Information, Markets and Society Kathy E. Gill 30 June 2008

30 June 2008 COM597 - Gill Overview What is an Info Economy? Economics 101 Types of goods Network effects Examples and Discussion

30 June 2008 COM597 - Gill But first . This instrument can teach, it can illuminate; yes, and it can even inspire. But it can do so only to the extent that humans are determined to use it to those ends. Otherwise it is merely wires and lights in a box. There is a great and perhaps decisive battle to be fought against ignorance, intolerance and indifference. This weapon of television could be useful. Edward R. Murrow, 1958, RTNDA Convention

30 June 2008 COM597 - Gill What Is An Info Economy? An economy based on the exchange of knowledge information and services rather than physical goods and services. Australian Govt, Dept. Finance and Administration, 2001.

30 June 2008 COM597 - Gill History of Term, Concept 1963: Tadeo Umesao, Kyoto University, forecast an information industry 1973: Daniel Bell, Harvard, described a knowledge-based post-industrial economy 1981: Frederick Williams, UT Austin, said the communication revolution had arrived and expounded on the knowledge worker The Information Society, A Retrospective View. Dordick and Wang. 1993.

30 June 2008 COM597 - Gill Bell Post-industrial society will be organized around knowledge for the purpose of social control and the directing of innovation and change The transformation is industrial to service Anticipated tension between high-tech, intellectual work and nonprofessionals

30 June 2008 COM597 - Gill Digital Expectations Personal anecdote about trying to read journal article, Blackwell Publishing (UK)

30 June 2008 COM597 - Gill Today (almost!) 1997: Bill Gates traced the computer from mainframe to personal to network. [W]e have the most powerful communications medium of all time And the information age is changing business in a fundamental way [as well as] the way we entertain and [educate] ourselves. Information Technology, Corporate Productivity and the New Economy, p 4

30 June 2008 COM597 - Gill No Standard Nomenclature Info Economy, Post-Industrial Economy, New Economy? One definition: the new economy is an integration of free-market economies, globalization and information technology Information Technology, Corporate Productivity and the New Economy, p 9

30 June 2008 COM597 - Gill 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

30 June 2008 COM597 - Gill 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 Protocols: HTTP, FTP, VoIP

30 June 2008 COM597 - Gill Societal Factors Demand for IT: Productivity? Effect of Growth: Collapse of space and time Reduction of scarcity

30 June 2008 COM597 - Gill 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

30 June 2008 COM597 - Gill 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.

30 June 2008 COM597 - Gill Economics 101 Supply & Demand Market Structure Types of Goods Network Effects Examples/Discussion

30 June 2008 COM597 - Gill 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 $$ - its also time, work, savings Driving principle: that people optimize the utility (satisfaction) of goods and services consumed - that we are rational

30 June 2008 COM597 - Gill John Kenneth Galbraith Faced with the choice between changing ones mind or proving that there is no need to do so, almost everybody gets busy on the proof.

30 June 2008 COM597 - Gill Kuhnen & Knutson (2005) Found that two brain areas known to be part of emotional processing (the limbic system) can help predict financial choices

30 June 2008 COM597 - Gill 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

30 June 2008 COM597 - Gill Demand Curve Shows the quantity of a good (or service) that consumers are willing to buy at different prices Assumes all other things remain constant (static) Law of Demand: curve slopes downward (P on the vertical axis)

30 June 2008 COM597 - Gill 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

30 June 2008 COM597 - Gill Supply-Demand

30 June 2008 COM597 - Gill Competitive Markets (perfect competition) No buyer or seller can influence price Products and services are identical No barriers to entry/exit Everyone (consumer, worker, producer) has access to perfect information on prices and costs

30 June 2008 COM597 - Gill Market Structure Classic Free (Competitive) Market Low fixed costs Marginal cost = price marginal cost is the cost of producing one additional unit The Natural Monopoly Large fixed costs Small/zero marginal costs

30 June 2008 COM597 - Gill Economics of Information Costly to produce Inexpensive to re-produce Economist-speak: High fixed costs, low marginal costs

30 June 2008 COM597 - Gill Economics of Attention Info overload: a wealth of information creates a poverty of attention (Herbert Simon)

30 June 2008 COM597 - Gill 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)

30 June 2008 COM597 - Gill 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!)

30 June 2008 COM597 - Gill 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.

30 June 2008 COM597 - Gill Types of Excludability (traditional) Trade Secrets (Coca Cola) Patents (Amazon One-Click) Copyright Will people create knowledge if they cant charge for it? WB says No. Open source movement says Yes.

30 June 2008 COM597 - Gill Digital Excludability (transitional?) DRM iTunes Subscriptions RealNetworks and Napster, The Economist and the WSJ Lawsuits

30 June 2008 COM597 - Gill 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

30 June 2008 COM597 - Gill Complementary Goods CDs + CD Player Websites optimized for a specific browser Bluetooth headset & cellphone Issues: network effects & lock-in

30 June 2008 COM597 - Gill Network effects (1/2) Static analysis: One persons decision to adopt a new piece of software (or other technology) has no effect on someone elses welfare or decision to adopt Assumes no network externality

30 June 2008 COM597 - Gill 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

30 June 2008 COM597 - Gill 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)

30 June 2008 COM597 - Gill Philosophy Varian thinks its a good thing for firms to figure out how to create a lock as a way to improve the bottom line I think that, at best, its a short-term strategy and that it is potentially harmful to society

30 June 2008 COM597 - Gill 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

30 June 2008 COM597 - Gill Examples AM v FM radio Beta v VHS Mac v Windows QWERTY v DVORAK BlueRay v HD-DVD GSM v CDMA

30 June 2008 COM597 - Gill One More Point Time (fixed) + Info Explosion (overload?) = Increased competition for old media

30 June 2008 COM597 - Gill 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

30 June 2008 COM597 - Gill 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

30 June 2008 COM597 - Gill For Wednesday Post to your blog . Reflection on this weeks readings AND reflection on your learning goals for the quarter. Categorize both posts Reflection

30 June 2008 COM597 - Gill Next Assignments 3 July: post your scholarly article and a reflection on the assigned article 8 July: post your book review 10 July: post a reflection on someone elses scholarly article 10 July: face-to-face meeting here

30 June 2008 COM597 - Gill Lab Demo tagging Set Up Wordpress Blogs

30 June 2008 COM597 - Gill 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

30 June 2008 COM597 - Gill 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)

30 June 2008 COM597 - Gill 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 Srgard. TV Advertising, Programming Investments, and Product-Market Oligopoly http://www.nhh.no/sam/res-publ/2000/dp06.pdf