This document discusses the economics of the information economy. It notes that information can be digitized as streams of bits, including text, images, videos and music. Information has unique cost and demand characteristics. While expensive to produce initially, it is cheap to reproduce, leading to high fixed costs but low marginal costs of production. Maximizing the value of intellectual property in this environment, rather than just protection, is important. The document also discusses how technology adds value by making information more accessible, and some of the competitive dynamics that can emerge around systems, lock-in, network effects, and standards compatibility in the information economy.

1. Part II
The Information Economy

2. Century ago
• The world become smaller.
• Rapid communication technology
• Unprecedented scale of economics.
• Built vast empires.
• Great fortunes, Monopoly.
• Government interruption.

3. Now
• Technology changes but economic law does
not.
• Focused on trees of technological change,
fail to see forest.
• Success and failure
• E.g. Netscape, software and hardware.
• System

4. Information
• Anything that can be digitized: encoded as a
stream of bits.
– Text, images, videos, music, etc.
– a.k.a. content, digital goods
• Unique cost characteristics
• Unique demand characteristics
• Value: entertainment, business

5. Cost structure
• Expensive to produce, cheap to reproduce
• High fixed cost, low marginal cost
– Not only fixed, but sunk
– No significant capacity constraints
– Customer value, not production cost.
– Particular market structures
• Monopoly
• Cost leadership
• Product differentiation (versioning)

6. Rights Management
• Low reproduction cost is two-edged sword
– Cheap for owners (high profit margin)
– But also cheap for copiers
• Maximize value of IP, not protection
• Examples
– Library industry
– Video industry

7. Consumption Characteristics
• Experience good
– Browsing
– Always new
– Reputation and brand identity
• E.g. Kantipur

8. Economics of attention
• Overload
– Economics of attention
– Herbert Simon: “a wealth of information
creates a poverty of attention”
– Locating, filtering and communicating
– Hotmail example
– Broadcast, point-to-point, hybrid
– Web servers-behavior of customers

9. Technology
• Infrastructure to store, retrieve, filter,
manipulate, view, transmit, and receive
information
• As BOTTLE is to WINE.
• Adds value to information by making it
more accessible.
– Web = 1 terabyte of text = 1 million books
– If 10% useful = 1 Borders Bookstore
– Value of Web is in ease of access
• Front end to databases, etc.
• Currency

10. Systems Competition
• Microsoft-Intel: Wintel
– Intel
• Commoditize complementory chips
– Microsoft
• Commoditize PCs (ISVs, OEMs)
• Apple
– Integrated solution
– Worked better, but lack of competition and
scale led to current problems

11. Lock-In and Switching Costs
• Example: Stereos and LPs
– Costly switch to CDs
• Systems lock-in: durable complements
– Hardware, software, and wetware
– Individual, organizational, and societal

12. Network Effects
• Value depends on number of users
• Positive feedback
– Fax (patented in 1843)
– Internet (1980s)
• Indirect network effects
– Software
• Expectations management
– Competitive pre-announcements

13. Compatibility
• Examples
– Beta v. VHS
– Sony v. Philips for DVD
• Role of 3rd parties
• Read v. write standards
• Backwards compatibility?
– Windows 95
– Windows NT

14. Basic Strategies
• Go it alone
• Partnerships (Java)
• Formal standard setting
– Widespread use
– Licensing requirements
• Competition in a market or for a market?

15. Policy
• Understand environment
• IP policy
• Competition policy
– Regulation
– Antitrust
• Electronic commerce
– Contracts
– Privacy

16. Information is Different…
but not so different
• Key concepts
– Versioning
– Lock-in
– Systems competition,
– Network effects