the information economy

Chapter 11 The information economy David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith 11.1 11.2 Use of the internet 0 200 400 600 800 1000 1200 £bn. 1997 1999 2001 2003 Business to business use of the internet 11.3 e-products  An e-product: – can be digitally encoded then transmitted rapidly, accurately and cheaply  e.g. music, films, books, sport …  Fixed costs of producing e-products are huge …  … but marginal costs of distribution are tiny  implying vast economies of scale 11.4 Consuming information  experience  overload  switching costs  network externalities Four key features of e-products: 11.5 Experience products  An experience good or service is one that must be sampled before the user knows its value – information is nearly always new – marketing needs careful attention  free samples  previews  establishing reputation 11.6 Information overload  … arises when the volume of available information is large  …but the cost of processing it is high  screening devices become crucial 11.7 Switching costs  … arise when existing costs are sunk  so changing supplier incurs additional costs  smart suppliers devise strategies for locking in their customers  e.g. air miles, supermarket reward cards 11.8 Network externalities Suppose D 1 represents the demand curve for a product exhibiting network externalities £ Quantity D 1 P 1 Q 1 With price at P 1 , demand is limited. If price is reduced to P 2 , more people find the network attractive so not only is there a move along the demand curve, but there is a shift in demand. Long-run demand is more elastic (DD). P 2 D 2 Q 2 D D 11.9 Information: the supply side  Given substantial economies of scale, we expect monopoly suppliers of information products:  Dominant firm with competitive fringe  e.g. Microsoft  Niche market monopolies [...]... range of products that partly complement one another – – e.g Microsoft and Intel airline alliances: One World, Star 11.11 Understanding the e -economy 1 The information revolution is changing our lives – but few of its activities or market tactics are unprecedented  2 The revolution in technology has not required a corresponding revolution in economic theory  11.12 ...Pricing information products  Strategies for pricing information products: – two-part tariff  – versioning  – an annual charge to cover fixed costs, and a small price per unit related to marginal costs the deliberate creation of different qualities to facilitate price discrimination bundling  the joint supply of more than one product to reduce the need for price discrimination . find the network attractive so not only is there a move along the demand curve, but there is a shift in demand. Long-run demand is more elastic (DD). P 2 D 2 Q 2 D D 11.9 Information: the supply. products that partly complement one another – e.g. Microsoft and Intel – airline alliances: One World, Star 11.12 Understanding the e -economy  1 The information revolution is changing our. Chapter 11 The information economy David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith 11.1 11.2 Use of the internet 0 200 400 600 800 1000 1200 £bn. 1997