Digital Networks

Digital Networks Kathy E. Gill 11 January 2012

What Is An Info Economy?
“ An economy based on the exchange of knowledge information and services rather than physical goods and services.” Australian Gov ’ t , Dept. Finance and Administration, 2001.

What is Information?
In the context of this class, anything that can be converted to bits, ie, digitized, is an information good
Entertainment
News
Business Info
Software

What is Information Technology?
Telecommunications, computers, software
Communication: E-mail, IM, TheWeb
Networks: Extranet, Intranet, Internet, LAN, WAN
Software: Expert systems, Enterprise Resource Planning, Query and Reporting, Data Mining
Networks: T1, T3, Wireless, WiMax
Protocols: HTTP, FTP, VoIP, GoogleWave?

Competing Theories
Technology optimists
A new society without pollution; time for creative work; participatory democracy; perfect markets…
Technology pessimists
No new society but an increase the divide between rich and poor; greater control over individuals; erosion of privacy…
Technology + economics +society

Summary
Use whatever label you wish … the makeup of our economy has changed. Information as a good and information technologies have replaced goods made of atoms and technologies resting on muscle.

What Is Economics?
Economics is the study of how people (and institutions) act in a society with limited resources (iow, scarcity)
The choices are more diverse than simply $$ - it ’s also time, work, savings
Driving principle: that people optimize the “utility” (satisfaction) of goods and services consumed - that we are rational

Supply-Demand

Economics of Information
Costly to produce
Inexpensive to re-produce
Economist-speak:
High fixed costs, low marginal costs

Economics of Attention
Info overload: “a wealth of information creates a poverty of attention” (Herbert Simon)

Types of Goods (1/2)
Non-rival - a good that can be used by more than one person at the same time (an idea)
Non-excludable - it is not possible for the “owner” to exclude others from consuming this good (non-patented idea)

Types of Goods (2/2) Rival Non-Rival Excludable
Most consumer goods
Private land
Services
Single license software
Trade secrets
Multi-license software
Patents
Subscription web sites
Non-Excludable
Public land
Most roads
Water - rivers, lakes
“ Public Goods”
Basic research
Defense, police, firemen
Lighthouse
“ Open” websites
TV (not cable!)

Excludability and Information
From the World Bank : Assume someone produces a valuable theorem, but it cannot be kept secret -- it must be made immediately available. Because anyone can immediately use it, there is no way for an individual to profit from creating it.

Types of Excludability (traditional)
Trade Secrets (Coca Cola)
Patents (Amazon One-Click)
Copyright
Will people create knowledge if they can ’t charge for it? WB says No. Open source movement says Yes.

Digital Excludability (transitional?)
DRM
iTunes, Amazon
Difference in video and music
Subscriptions
RealNetworks and Napster, The Economist and the WSJ
Lawsuits

An Experience Good
A good is an “experience” good if a consumer has to experience it to value it
Various biz strategies encourage “try before you buy”

Complementary Goods
CDs + CD Player
Websites “optimized” for a specific browser
Bluetooth headset & cellphone
Issues: network effects & lock-in

NETWORK EFFECTS (1/2)
Static analysis:
One person ’s decision to adopt a new piece of software (or other technology) has no effect on someone else’s welfare or decision to adopt
Assumes no network externality

Network effects (2/2)
Dynamic analysis:
The value of the software (or technology) depends upon the decisions of others (interoperability, for example)
Assumes there is a network externality

Locked In!
Consumers may be locked into a network because of “cost of exit” (switching)
Contracts (cell phone 24-month policies)
Training (learn a new system – ugh)
Data conversion (from Word to Word Perfect, for example)
Search cost (finding the new product)
Loyalty cost (frequent flyer programs, “minutes carry-over”)

Tipping
As market share increases for any one product (system, technology), there are increasing returns (externality) from increasing consumer demand, leading to dominance by one system

EXAMPLES
AM v FM radio
Beta v VHS
Mac v Windows
QWERTY v DVORAK
BlueRay v HD-DVD
GSM v CDMA

Conclusion (1/2)
Economy is increasingly reliant on information technologies and information
Firms in this sector have a different cost structure than traditional goods/sectors like ag or manufacturing

Conclusion (2/2)
The products in this sector have characteristics of a public good -- the antithesis of a scarce, excludable good
Thus information technology is disruptive, economically and socially

Resources (1/3)
The Inkjet Printer, from The Economist. (2002) http://emlab.berkeley.edu/users/bhhall/e124inkjetprinter.html
The Invention of Email, from Pretext Magazine (1998) http://emlab.berkeley.edu/users/bhhall/e124emailinvention.pdf
Hal R. Varian , “High Technology Industries and Market Structure” (2001) http://www.sims.berkeley.edu/~hal/Papers/structure/structure.html
Science and Engineering Indicators (2002) National Science Board. http://www.nsf.gov/sbe/srs/seind02/start.htm

Resources (2/3)
Michael L. Katz and Carl Shapiro. “Systems Competition and Network Effects,” Journal of Economic Perspectives , Vol 8 No 2 (1994)
Nicholas Economides. “The Economics of Networks,” International Journal of Industrial Organization, October (1996) http://www.stern.nyu.edu/networks/top.html
S.J. Liebowitz and Stephen E. Margolis. “Network Externality: An Uncommon Tragedy,” Journal of Economic Perspectives , Vol 8 No 2 (1994)

Resources (3/3)
Timothy F. Bresnahan. “The Economics of the Microsoft Case.” http://www.stanford.edu/~tbres/Microsoft/The_Economics_of_The_Microsoft_Case.pdf
Stephen Martin. “The Nature of Innovation Market Failure and the Design of Public Support for Private Innovation” http://www.sam.sdu.dk/undervis/92172.E03/martin_scott.pdf
Tore Nilssen and Lars Sørgard. “TV Advertising, Programming Investments, and Product-Market Oligopoly” http://www.nhh.no/sam/res-publ/2000/dp06.pdf

Digital Networks

by Kathy Gill on Jan 11, 2012

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Digital Networks — Presentation Transcript