chapter thirty-four information technology. information technologies u computers, answering...
TRANSCRIPT
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Chapter Thirty-Four
Information Technology
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Information Technologies
Computers, answering machines, FAXes, pagers, cellular phones, …
Many provide strong complementarities.
E.g. email is useful only if lots of people use it -- a network externality.
And computers are more useful if many people use the same software.
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Information Technologies
But then switching technologies becomes very costly -- lock-in.
E.g. Microsoft Windows. How do markets operate when there
are switching costs or network externalities?
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Competition & Switching Costs
Producer’s cost per month of providing a network service is c per customer.
Customer’s switching cost is s. Producer offers a one month
discount, d. Rate of interest is r.
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Competition & Switching Costs
All producers set the same nondiscounted price of p per month.
When is switching producers rational for a customer?
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Competition & Switching Costs
Cost of not switching is ppr
.
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Competition & Switching Costs
Cost of not switching is
Cost from switching is
ppr
.
p dprs .
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Competition & Switching Costs
Cost of not switching is
Cost from switching is
Switch if
ppr
.
p dprs p
pr
.
p dprs .
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Competition & Switching Costs
Cost of not switching is
Cost from switching is
Switch if
I.e. if
ppr
.
p dprs p
pr
.
p dprs .
d s .
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Competition & Switching Costs
Switch if
I.e. if Producer competition will ensure at a
market equilibrium that customers are indifferent between switching or not
p dprs p
pr
.
d s .
d s .
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Competition & Switching Costs
At equilibrium, producer economic profits are zero.
I.e. p d cp cr
0.
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Competition & Switching Costs
At equilibrium, producer economic profits are zero.
I.e.
Since , at equilibriumd s
p d cp cr
0.
p cp cr
s
.
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Competition & Switching Costs
At equilibrium, producer economic profits are zero.
I.e.
Since , at equilibrium
I.e. present-valued producer profit = consumer switching cost.
d s
p d cp cr
0.
p cp cr
s
.
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Competition & Network Externalities
Individuals 1,…,1000. Each can buy one unit of a good
providing a network externality. Person v values a unit of the good at
nv, where n is the number of persons who buy the good.
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Competition & Network Externalities
Individuals 1,…,1000. Each can buy one unit of a good
providing a network externality. Person v values a unit of the good at
nv, where n is the number of persons who buy the good.
At a price p, what is the quantity demanded of the good?
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Competition & Network Externalities
If v is the marginal buyer, valuing the good at nv = p, then all buyers v’ > v value the good more, and so buy it.
Quantity demanded is n = 1000 - v. So inverse demand is p = n(1000-
n).
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Competition & Network Externalities
0 1000n
Willingness-to-pay p = n(1000-n)
Demand Curve
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Competition & Network Externalities
Suppose all suppliers have the same marginal production cost, c.
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Competition & Network Externalities
0 1000n
Demand Curve
Supply Curvec
Willingness-to-pay p = n(1000-n)
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Competition & Network Externalities
What are the market equilibria?
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Competition & Network Externalities
What are the market equilibria? (a) No buyer buys, no seller supplies.
– If n = 0, then value nv = 0 for all buyers v, so no buyer buys.
– If no buyer buys, then no seller supplies.
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Competition & Network Externalities
0 1000n
Demand Curve
Supply Curve(a)
c
Willingness-to-pay p = n(1000-n)
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Competition & Network Externalities
0 1000n
Demand Curve
Supply Curve
n’
(a)c
Willingness-to-pay p = n(1000-n)
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Competition & Network Externalities
What are the market equilibria? (b) A small number, n’, of buyers
buy.
– small n’ small network externality value n’v
– good is bought only by buyers with n’v c; i.e. only large v v’ = c/n’.
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Competition & Network Externalities
0 1000n
Demand Curve
Supply Curve
n’
(b)
n”
(c)
(a)c
Willingness-to-pay p = n(1000-n)
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Competition & Network Externalities
What are the market equilibria? (c) A large number, n”, of buyers buy.
– Large n” large network externality value n”v
– good is bought only by buyers with n’v c; i.e. up to small v v” = c/n”.
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Competition & Network Externalities
0 1000n
Demand Curve
Supply Curve
n’
(b)
n”
(c)
(a)c
Which equilibrium is likely to occur?
Willingness-to-pay p = n(1000-n)
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Competition & Network Externalities
Suppose the market expands whenever willingness-to-pay exceeds marginal production cost, c.
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Competition & Network Externalities
0 1000n
Demand Curve
Supply Curve
n’ n”
c
Which equilibrium is likely to occur?
Willingness-to-pay p = n(1000-n)
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Competition & Network Externalities
0 1000n
Demand Curve
Supply Curve
n’ n”
c
Which equilibrium is likely to occur?
Willingness-to-pay p = n(1000-n)
Unstable
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Competition & Network Externalities
0 1000n
Demand Curve
Supply Curve
n”
c
Which equilibrium is likely to occur?
Willingness-to-pay p = n(1000-n)
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Competition & Network Externalities
0 1000n
Demand Curve
Supply Curve
n”
c
Which equilibrium is likely to occur?
Willingness-to-pay p = n(1000-n)
Stable
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Competition & Network Externalities
0 1000n
Demand Curve
Supply Curve
n”
c
Which equilibrium is likely to occur?
Willingness-to-pay p = n(1000-n)
StableStable
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Rights Management
Should a good be sold outright, licensed for production by
others, or rented?
How is the ownership right of the good to be managed?
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Rights Management
Suppose production costs are negligible.
Market demand is p(y). The firm wishes to max
yp y y( ) .
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Rights Management
y
p
p y( )
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Rights Management
y
p
p y( )
( ) ( )y p y y
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Rights Management
y* y
p
p y( )
( ) ( )y p y y
p y( *)
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Rights Management
The rights owner now allows a free trial period. This causes
– an increase in consumptionY y , 1
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Rights Management
The rights owner now allows a free trial period. This causes
– an increase in consumption
and a decrease in sales per unit of consumption
yY
.
Y y , 1
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Rights Management
The rights owner now allows a free trial period. This causes
– increase in value to all users increase in willingness-to-pay;
P Y p Y( ) ( ), . 1
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Rights Management
y Y,
p
p y( )P Y p Y( ) ( )
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Rights Management
The firm’s problem is now to
maxY
P YY
p YY
p Y Y( ) ( ) ( ) .
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Rights Management
The firm’s problem is now to
This problem must have the same solution as max
yp y y( ) .
maxY
P YY
p YY
p Y Y( ) ( ) ( ) .
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Rights Management
The firm’s problem is now to
This problem must have the same solution as
So
maxy
p y y( ) .
y Y* *.
maxY
P YY
p YY
p Y Y( ) ( ) ( ) .
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Rights Management
y
p
p y( )
( ) ( )y p y y
y*
p y( *) P Y p Y( ) ( )
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Rights Management
y Y* *
p y( *)p Y( *)
y
p
p y( )
( ) ( )y p y y
( ) ( )Y p Y Y
1 higher profit
P Y p Y( ) ( )
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Rights Management
y Y* *
p y( *)p Y( *)
y
p
p y( )
( ) ( )y p y y
( ) ( )Y p Y Y
1 lower profit
P Y p Y( ) ( )
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Sharing Intellectual Property Produce a lot for direct sales, or only
a little for multiple rentals? Lending books, software. Renting tools, videos etc. Sell movies directly, or only sell to
video rental stores, or pay-per-view? When is selling for rental more
profitable than selling for personal use only?
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Sharing Intellectual Property
F is the fixed cost of designing the good.
c is the constant marginal cost of copying the good.
p(y) is the market demand. Direct sales problem is to
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Sharing Intellectual Property
F is the fixed cost of designing the good.
c is the constant marginal cost of copying the good.
p(y) is the market demand. Direct sales problem is to
maxy
p y y cy F( ) .
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Sharing Intellectual Property
Is selling for rental more profitable? Each rental unit is used by k > 1
consumers. So y units sold x = ky consumption
units.
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Sharing Intellectual Property
Is selling for rental more profitable? Each rental unit is used by k > 1
consumers. So y units sold x = ky consumption
units. Marginal consumer’s willingness-to-
pay is p(x) = p(ky).
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Sharing Intellectual Property
Is selling for rental more profitable? Each rental unit used by k > 1 consumers. So y units sold x = ky consumption
units. Marginal consumer’s willingness-to-pay is
p(x) = p(ky). Rental transaction cost t reduces
willingness-to-pay to p(ky) - t.
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Sharing Intellectual Property
Rental transaction cost t reduces willingness-to-pay to p(ky) - t.
Rental store’s willingness-to-pay isP y k p ky ts ( ) [ ( ) ].
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Sharing Intellectual Property
Rental transaction cost t reduces willingness-to-pay to p(ky) - t.
Rental store’s willingness-to-pay is
Producer’s sale-for-rental problem isP y k p ky ts ( ) [ ( ) ].
P y y cy Fs ( ) maxy
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Sharing Intellectual Property
Rental transaction cost t reduces willingness-to-pay to p(ky) - t.
Rental store’s willingness-to-pay is
Producer’s sale-for-rental problem isP y k p ky ts ( ) [ ( ) ].
P y y cy F k p ky t y cy Fs ( ) [ ( ) ] maxy
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Sharing Intellectual Property
Rental transaction cost t reduces willingness-to-pay to p(ky) - t.
Rental store’s willingness-to-pay is
Producer’s sale-for-rental problem isP y k p ky ts ( ) [ ( ) ].
P y y cy F k p ky t y cy F
p ky kyck
t ky F
s ( ) [ ( ) ]
( ) .
FH IK
maxy
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Sharing Intellectual Property
p ky kyck
t ky F
p x xck
t x F
( )
( )
FH IK
FH IK
maxy
is the same problem as the direct saleproblem max
yp y y cy F( )
maxx
except for the marginal costs.
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Sharing Intellectual Property
p ky kyck
t ky F
p x xck
t x F
( )
( )
FH IK
FH IK
maxy
is the same problem as the direct saleproblem max
yp y y cy F( )
maxx
except for the marginal costs. Direct saleis better for the producer if c
ck
t .
![Page 61: Chapter Thirty-Four Information Technology. Information Technologies u Computers, answering machines, FAXes, pagers, cellular phones, … u Many provide](https://reader037.vdocument.in/reader037/viewer/2022110303/55167f47550346a25b8b4819/html5/thumbnails/61.jpg)
Sharing Intellectual Property
Direct sale is better for the producer if
I.e. if
cck
t .
ckk
t 1
.
![Page 62: Chapter Thirty-Four Information Technology. Information Technologies u Computers, answering machines, FAXes, pagers, cellular phones, … u Many provide](https://reader037.vdocument.in/reader037/viewer/2022110303/55167f47550346a25b8b4819/html5/thumbnails/62.jpg)
Sharing Intellectual Property
Direct sale is better for the producer if
Direct sale is better if
– replication cost c is low
– rental transaction cost t is high
– rentals per item, k, is small.
ckk
t 1
.