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Digital Networks Kathy E. Gill 11 January 2012
What Is An Info Economy? <ul><li>“ An economy based on the exchange of knowledge information and services rather than phys...
What is Information? <ul><li>In the context of this class, anything that can be converted to bits, ie, digitized, is an in...
What is Information Technology? <ul><li>Telecommunications, computers, software </li></ul><ul><ul><li>Communication: E-mai...
Competing Theories <ul><li>Technology optimists </li></ul><ul><ul><li>A new society without pollution; time for creative w...
Summary  <ul><li>Use whatever label you wish … the makeup of our economy has changed. Information as a good and informatio...
What Is Economics? <ul><li>Economics is the study of how people (and institutions) act in a society with limited resources...
Supply-Demand
Economics of Information <ul><li>Costly to produce </li></ul><ul><li>Inexpensive to re-produce </li></ul><ul><li>Economist...
Economics of Attention  <ul><li>Info overload:  “a wealth of information creates a poverty of attention” (Herbert Simon) <...
Types of Goods  (1/2) <ul><li>Non-rival - a good that can be used by more than one person at the same time (an idea) </li>...
Types of Goods   (2/2) Rival Non-Rival Excludable <ul><li>Most consumer goods </li></ul><ul><li>Private land </li></ul><ul...
Excludability and Information <ul><li>From the  World Bank :  Assume someone produces a valuable theorem, but it cannot be...
Types of Excludability (traditional) <ul><li>Trade Secrets (Coca Cola) </li></ul><ul><li>Patents (Amazon One-Click) </li><...
Digital Excludability (transitional?) <ul><li>DRM </li></ul><ul><ul><li>iTunes, Amazon </li></ul></ul><ul><ul><li>Differen...
An Experience Good <ul><li>A good is an  “experience” good if a consumer has to experience it to value it </li></ul><ul><u...
Complementary Goods <ul><li>CDs + CD Player </li></ul><ul><li>Websites  “optimized” for a specific browser </li></ul><ul><...
NETWORK EFFECTS  (1/2) <ul><li>Static analysis: </li></ul><ul><ul><li>One person ’s decision to adopt a new piece of softw...
Network effects  (2/2) <ul><li>Dynamic analysis: </li></ul><ul><ul><li>The value of the software (or technology) depends u...
 
Locked In! <ul><li>Consumers may be locked into a network because of  “cost of exit” (switching) </li></ul><ul><ul><li>Con...
Tipping <ul><li>As market share increases for any one product (system, technology), there are increasing returns (external...
EXAMPLES  <ul><li>AM v FM radio </li></ul><ul><li>Beta v VHS </li></ul><ul><li>Mac v Windows </li></ul><ul><li>QWERTY v DV...
Conclusion  (1/2) <ul><li>Economy is increasingly reliant on information technologies and information </li></ul><ul><li>Fi...
Conclusion  (2/2) <ul><li>The products in this sector have characteristics of a public good -- the antithesis of a scarce,...
Resources  (1/3) <ul><li>The Inkjet Printer, from  The Economist.  (2002)  http://emlab.berkeley.edu/users/bhhall/e124inkj...
Resources  (2/3) <ul><li>Michael L. Katz and Carl Shapiro.  “Systems Competition and Network Effects,”  Journal of Economi...
Resources  (3/3) <ul><li>Timothy F. Bresnahan.  “The Economics of the Microsoft Case.”  http://www.stanford.edu/~tbres/Mic...
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Digital Networks

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Week 2 lecture in digital technologies class, com495.

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Digital Networks

  1. 1. Digital Networks Kathy E. Gill 11 January 2012
  2. 2. What Is An Info Economy? <ul><li>“ 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. </li></ul>
  3. 3. What is Information? <ul><li>In the context of this class, anything that can be converted to bits, ie, digitized, is an information good </li></ul><ul><ul><li>Entertainment </li></ul></ul><ul><ul><li>News </li></ul></ul><ul><ul><li>Business Info </li></ul></ul><ul><ul><li>Software </li></ul></ul>
  4. 4. What is Information Technology? <ul><li>Telecommunications, computers, software </li></ul><ul><ul><li>Communication: E-mail, IM, TheWeb </li></ul></ul><ul><ul><li>Networks: Extranet, Intranet, Internet, LAN, WAN </li></ul></ul><ul><ul><li>Software: Expert systems, Enterprise Resource Planning, Query and Reporting, Data Mining </li></ul></ul><ul><ul><li>Networks: T1, T3, Wireless, WiMax </li></ul></ul><ul><ul><li>Protocols: HTTP, FTP, VoIP, GoogleWave? </li></ul></ul>
  5. 5. Competing Theories <ul><li>Technology optimists </li></ul><ul><ul><li>A new society without pollution; time for creative work; participatory democracy; perfect markets… </li></ul></ul><ul><li>Technology pessimists </li></ul><ul><ul><li>No new society but an increase the divide between rich and poor; greater control over individuals; erosion of privacy… </li></ul></ul><ul><li>Technology + economics +society </li></ul>
  6. 6. Summary <ul><li>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. </li></ul>
  7. 7. What Is Economics? <ul><li>Economics is the study of how people (and institutions) act in a society with limited resources (iow, scarcity) </li></ul><ul><ul><li>The choices are more diverse than simply $$ - it ’s also time, work, savings </li></ul></ul><ul><ul><li>Driving principle: that people optimize the “utility” (satisfaction) of goods and services consumed - that we are rational </li></ul></ul>
  8. 8. Supply-Demand
  9. 9. Economics of Information <ul><li>Costly to produce </li></ul><ul><li>Inexpensive to re-produce </li></ul><ul><li>Economist-speak: </li></ul><ul><ul><li>High fixed costs, low marginal costs </li></ul></ul>
  10. 10. Economics of Attention <ul><li>Info overload: “a wealth of information creates a poverty of attention” (Herbert Simon) </li></ul>
  11. 11. Types of Goods (1/2) <ul><li>Non-rival - a good that can be used by more than one person at the same time (an idea) </li></ul><ul><li>Non-excludable - it is not possible for the “owner” to exclude others from consuming this good (non-patented idea) </li></ul>
  12. 12. Types of Goods (2/2) Rival Non-Rival Excludable <ul><li>Most consumer goods </li></ul><ul><li>Private land </li></ul><ul><li>Services </li></ul><ul><li>Single license software </li></ul><ul><li>Trade secrets </li></ul><ul><li>Multi-license software </li></ul><ul><li>Patents </li></ul><ul><li>Subscription web sites </li></ul>Non-Excludable <ul><li>Public land </li></ul><ul><li>Most roads </li></ul><ul><li>Water - rivers, lakes </li></ul><ul><li>“ Public Goods” </li></ul><ul><li>Basic research </li></ul><ul><li>Defense, police, firemen </li></ul><ul><li>Lighthouse </li></ul><ul><li>“ Open” websites </li></ul><ul><li>TV (not cable!) </li></ul>
  13. 13. Excludability and Information <ul><li>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. </li></ul>
  14. 14. Types of Excludability (traditional) <ul><li>Trade Secrets (Coca Cola) </li></ul><ul><li>Patents (Amazon One-Click) </li></ul><ul><li>Copyright </li></ul><ul><li>Will people create knowledge if they can ’t charge for it? WB says No. Open source movement says Yes. </li></ul>
  15. 15. Digital Excludability (transitional?) <ul><li>DRM </li></ul><ul><ul><li>iTunes, Amazon </li></ul></ul><ul><ul><li>Difference in video and music </li></ul></ul><ul><li>Subscriptions </li></ul><ul><ul><li>RealNetworks and Napster, The Economist and the WSJ </li></ul></ul><ul><li>Lawsuits </li></ul>
  16. 16. An Experience Good <ul><li>A good is an “experience” good if a consumer has to experience it to value it </li></ul><ul><ul><li>Various biz strategies encourage “try before you buy” </li></ul></ul>
  17. 17. Complementary Goods <ul><li>CDs + CD Player </li></ul><ul><li>Websites “optimized” for a specific browser </li></ul><ul><li>Bluetooth headset & cellphone </li></ul><ul><li>Issues: network effects & lock-in </li></ul>
  18. 18. NETWORK EFFECTS (1/2) <ul><li>Static analysis: </li></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>Assumes no network externality </li></ul></ul>
  19. 19. Network effects (2/2) <ul><li>Dynamic analysis: </li></ul><ul><ul><li>The value of the software (or technology) depends upon the decisions of others (interoperability, for example) </li></ul></ul><ul><ul><li>Assumes there is a network externality </li></ul></ul>
  20. 21. Locked In! <ul><li>Consumers may be locked into a network because of “cost of exit” (switching) </li></ul><ul><ul><li>Contracts (cell phone 24-month policies) </li></ul></ul><ul><ul><li>Training (learn a new system – ugh) </li></ul></ul><ul><ul><li>Data conversion (from Word to Word Perfect, for example) </li></ul></ul><ul><ul><li>Search cost (finding the new product) </li></ul></ul><ul><ul><li>Loyalty cost (frequent flyer programs, “minutes carry-over”) </li></ul></ul>
  21. 22. Tipping <ul><li>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 </li></ul>
  22. 23. EXAMPLES <ul><li>AM v FM radio </li></ul><ul><li>Beta v VHS </li></ul><ul><li>Mac v Windows </li></ul><ul><li>QWERTY v DVORAK </li></ul><ul><li>BlueRay v HD-DVD </li></ul><ul><li>GSM v CDMA </li></ul>
  23. 24. Conclusion (1/2) <ul><li>Economy is increasingly reliant on information technologies and information </li></ul><ul><li>Firms in this sector have a different cost structure than traditional goods/sectors like ag or manufacturing </li></ul>
  24. 25. Conclusion (2/2) <ul><li>The products in this sector have characteristics of a public good -- the antithesis of a scarce, excludable good </li></ul><ul><li>Thus information technology is disruptive, economically and socially </li></ul>
  25. 26. Resources (1/3) <ul><li>The Inkjet Printer, from The Economist. (2002) http://emlab.berkeley.edu/users/bhhall/e124inkjetprinter.html </li></ul><ul><li>The Invention of Email, from Pretext Magazine (1998) http://emlab.berkeley.edu/users/bhhall/e124emailinvention.pdf </li></ul><ul><li>Hal R. Varian , “High Technology Industries and Market Structure” (2001) http://www.sims.berkeley.edu/~hal/Papers/structure/structure.html </li></ul><ul><li>Science and Engineering Indicators (2002) National Science Board. http://www.nsf.gov/sbe/srs/seind02/start.htm </li></ul>
  26. 27. Resources (2/3) <ul><li>Michael L. Katz and Carl Shapiro. “Systems Competition and Network Effects,” Journal of Economic Perspectives , Vol 8 No 2 (1994) </li></ul><ul><li>Nicholas Economides. “The Economics of Networks,” International Journal of Industrial Organization, October (1996) http://www.stern.nyu.edu/networks/top.html </li></ul><ul><li>S.J. Liebowitz and Stephen E. Margolis. “Network Externality: An Uncommon Tragedy,” Journal of Economic Perspectives , Vol 8 No 2 (1994) </li></ul>
  27. 28. Resources (3/3) <ul><li>Timothy F. Bresnahan. “The Economics of the Microsoft Case.” http://www.stanford.edu/~tbres/Microsoft/The_Economics_of_The_Microsoft_Case.pdf </li></ul><ul><li>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 </li></ul><ul><li>Tore Nilssen and Lars Sørgard. “TV Advertising, Programming Investments, and Product-Market Oligopoly” http://www.nhh.no/sam/res-publ/2000/dp06.pdf </li></ul>

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