Evolution of Digital Media Technologies: ePolitics

Kathy E. Gill

22 November 2004

Overview

Second paper due tomorrow Guest Lecture:

Dr. Kirsten Foot, Assistant Professor, kfoot@u.washington.edu

Food break Discussion Leaders Technology : an economic overview

Supply and Demand

Most widely used economic model Describes how consumers and

producers interact to determine the price of a good and the quantity that will be produced/sold

Demand Curve

Shows the quantity of a good (or service) that consumers are willing to buy at each price

Assumes “all other things” remain constant (static)

Law of Demand: curve slopes “downward” (P on the vertical axis)

Supply Curve

Shows the quantity of a good (or service) that businesses are willing to sell at each price

Assumes “all other things” remain constant (static)

No “law of supply”

Supply-Demand

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: dental, rental cars, tax prep Single license software

Trade secrets Multi-license software Patents Subscription web sites

Non-Excludable

Public land Most roads Water?

Basic research Defense, police, firemen Lighthouse “Open” websites

Supply of innovation

Dependent on State of scientific/technological

knowledge (technological opportunity) Cost, availability of inputs (knowledge

workers, equipment) Ability to capture increased profits

arising from the innovation (appropriability)

Demand for innovation

Dependent on Cost reduction (process innovation) Consumer benefit from new product

(product innovation) Consumer benefit from improvement in

existing product (incremental product innovation)

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 (1/2)

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 12-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 (1/2)

AM v FM radio Beta v VHS Mac v Windows QWERTY v DVORAK

Examples (2/2)

OS/2 introduced in 1991 OS/2 sales = 400K; Win sales = 18M OS/2 technically superior – 32-bit

processing not provided by Win until late 1995

OS/2 withdrawn from market (failed) due to incompatibility with other software (cause of poor sales?)

Market Structure

Number of firms Ease of entry and exit Ability to differentiate product from

competitor’s Four types

Competitive (perfect) markets

Consumers believe products are undifferentiated (substitutability)

Firms can enter/exit freely (low capital investment)

Buyers and sellers know the prices (access to info)

Low transaction costs Firms are “price-takers” Dial up service

Monopoly One supplier No product substitution Does not lose all sales if it raises price Price setter Natural monopoly: One firm can produce

all output at lower cost than several firms combined

Example: water utility, cable utility, MSWindows (according to US Gov’t)

Oligopoly A few relatively large firms High barriers to entry Products are good (not perfect)

substitutes Each firm can set its price Market failure: sub-optimal consumption Example: wireless/long distance telecom,

cable/satellite/dsl

Monopolistic Competition

Many relatively small firms Freedom of entry/exit Differentiated products > brand

preferences Market failure: excess capacity

Is variety really the spice of life?

Make Way for Advertising

Advertising persuades, helps build brand

PCs: Dell, HP/Compaq, Gateway, IBM …

MP3 Players Wireless telephony

Incentives for innovation? Monopolist has less incentive to innovate

Already has some profit Cost reduction is spread over smaller output

Monopolist has relatively more incentive for minor than for major innovations

Kenneth Arrow in Nelson, R. (ed.), The Rate and Direction of Inventive Activity, Princeton University Press (1962). Cited by Prof. Bronwyn H. Hall, Berkeley, Economics 124

Economics and Innovation (1/3)

Schumpeter’s first “model of innovative activity suggests that ease of entry will promote innovation and that small- and medium-sized enterprises (SMEs) will most often be the vehicles of technological advance.” [Martin 1999]

Economics and Innovation (2/3)

The “Schumpeter of Capitalism, Socialism, and Democracy… conceived of technological progress as emanating from the industrial research laboratories of large firms that enjoyed positions of static market power.” [Martin 1999]

Economics and Innovation (3/3)

After debating these two viewpoints, the consensus seems to be that “the level of investment in research and development is likely to be too low, from a social point of view, whether market structure is nearly atomistic, a highly concentrated oligopoly, or something in between.” [Martin 1999]

Summary Theoretical Foundation

Communications, Diffusion of Innovation

Historical Context Applications

Personal, Institutional (for profit, non profit, government)

Implications

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