Unit 2:Markets for Information Goods

8th Semester
BIM Notes

Informtaion
Anything that can be digitized or encoded as a stream of bits (can be expressed in binary form) is information.

  • Text, images, videos, music, digital goods, database, books, magazines, web pages etc.
  • have entertainment and business value
  • unique cost characteristics
  • unique demand characteristics

1.4 FOUNDATIONS OF THE INFORMATION ECONOMY

Communication

  • Imparting or exchanging of information by speaking, writing, or using some other medium.

Technology

  • The tools and machines that help to solve problems or do new things.

Information

  • Facts provided or learned about something or someone.

 1.5.1

Information good in economics and law is a type of commodity whose market value is derived from information it contains.Anything that is digitized, and also consumers are willing to pay for it.Eg. Music, online books, DVD movies

  • Examples include a CD’s containing pieces of music, DVD’s containing movie content, and books containing short stories.
  • These can exist in either digitized form or analog format.

Features of Information Goods

  • Cost Characteristics
  • Right Management
  • Consumption Characteristics
  • Switching Costs
  • Network Externalities

1.5.2 Cost of Producing Information

  • Information is never free.
  • high production cost, low reproduction cost
  • high fixed cost, low marginal cost
  • low distribution cost
  • price of information according to its value, not its cost.

The four main costs involved in producing any information are:

  • Hardware :-Original cost of hardware, replacement of hardware, Maintenance, Storage
  • Software :- Initial purchase of software, Upgrading software, Licenses, Support costs
  • Consumables :-Cost of paper, toners and cartridges are known as ‘consumables’
  • Manpower :- Cost of labour, Training

1.5.3 Managing Intellectual Property

Intellectual property :- Any information entity that is a creation of mind and has a monetary value. Cost is incurred in producing the first copy of that information and hence a suitable price is set to sell it .Intangible property that is the result of creativity, such as patents, copyrights, etc.It Can be protected through Copyrights, Patent, and Trademark Acts.
Threat :- Cheap reproduction and sales by other parties. E.g.. EA Sports FIFA games, the cracked versions ,Library industry ,Video industry.
Low reproduction cost is two-edged sword

  • Cheap for owners (high profit margin)
  • But also cheap for copiers

When managing Intellectual property, your goal should be t o choose the terms and conditions that maximize the value of your intellectual property,not the terms and conditions that maximize the protection

1.5.4 Economic and Public Goods

An economic good is a good or service that has a benefit or utility to society. Also, economic goods have a degree of scarcity and therefore an opportunity cost.This is in contrast to a free good (like air, sea water) where there is no opportunity cost but abundance. Free goods cannot be traded. However, with economic goods where there is some scarcity and value, people will be willing to pay for them (in some form).
Public goods have the characteristics of non-rivalry and non-excludability, e.g. street lighting, and law & order.They are economic goods because there is a scarcity and opportunity cost in providing for them.They are free at the point of use. But, this does not make them ‘free goods’ according to strict economic definition. Public goods such as street lighting are not free to society because you pay for them indirectly out of taxes.

1.5.5 Economics of attention

The attention economy privileges and emphasizes context over content.Products and services must be sold and marketed not just on their merits of utility, cost savings, and enjoyment, but with a thick layer of symbolic packaging and narratives that confer meaning in order to capture consumers’ attention and money.
On a Web site, the content, product, or service being offered is important but hardly sufficient. Rather, as a way of getting visitors to stay at a site and spend money, the site must feature an attractive image and user interface designed to augment the feelings and images the merchant wants them to harbor.
 

1.6 TECHNOLOGY

Infrastructure is to information as a bottle is to wine .Content providers cannot operate without infrastructure suppliers .The infrastructure that makes it possible to store, search, retrieve, copy, filter, manipulate, view, transmit, and receive information .Improved information infrastructure has vastly increased our ability to store, retrieve, sort, filter, and distribute information, thereby greatly enhancing the value of the underlying information itself.

1.6.1  System Competition

System is the collections of two or more components together with an interface that allows the compo­nents to work together.
Examples:

  • nuts and bolts
  • Home audio or video compo­nents and programming
  • auto­mobiles, repair parts and service
  • automatic teller machines and ATM cards
  • camera bodies and lenses

one firm cannot hope to offer all the pieces .Different components are made by different manufacturers using very different production.In the information economy, companies selling complementary components, are equally important.
Firms must focus not only on their competitors but also on their collaborators .Forming alliances, cultivating partners, and ensuring compatibility
Highlights three important issues:

  • Expectations
  • Coordination
  • Compatibility
  • Expectations about availability, price, and quality of the components that they will be buying in the future. Because switching suppliers is costly because new relation-specific investments have to be made.
  • Coordination between producers of complementary products compounds the difficulty of consumer choice. Eg. SW dependency in HW.
  • Compatibility: The more compatible products there are, the bigger the network grows. And the bigger the network grows, the more compatible and cheaper products will be offered.

1.6.2 Lock-In and Switching Costs

Lock-in hinders customers from changing suppliers in response to changes in efficiency, and gives vendors profitable market power – over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects.

  • E.g. we are locked in to MS-Windows O.S. for desktop computing
  • MS-Office for working with documents
  • Google for search engine
  • YouTube for video browsing online
  • Cassettes and CDs during late 1990s /early 2000s in Nepal

Reason for lock-in :- The product still offers better value and familiarity than substitutes
Switching costs are the costs that a consumer incurs as a result of changing brands, suppliers or products.Although most switching costs are monetary in nature, there are also psychological effort and time-based switching costs.

  • E.g. from typewriter to computer in an office , From NTC ADSL to World Link’s Fiber Optics //Initially high, but lower in regular operation
  • From Windows OS to Linux based OS //Initially low, but high in regular operation

Higher switching cost towards our product and lower switching cost towards competitor’s product is unfavorable

1.6.3

Network Externalities

When a person buys a good or service, he becomes part of a network.Thus the network increases or decreases in size.The utility that people derive depends on the size of the network.By joining I make everyone else in the network better off.A person’s demand may be affected by the number of other people who have purchased the good.

  • A positive network externality (positive feedback) exists if the quantity of a good demanded by a consumer increases in response to an increase in purchases by other consumers.Eg. Before 1982 use of fax in office were limited but its demand increased from 1985 due to positive feedback .Prime Example :-–Use and Growth of Internet
  • A negative network externality (negative feedback) exists if the quantity of a good demanded by a consumer decreases in response to an decrease in purchases by other consumers.

Standardization

Bringing in a completely new and incompatible technology / product with its own unique specifications .It Involves patent associated with new technology being offered .Intended to give competition to existing products and even create a completely new market

  • E.g. Introduction of CDs

With network externalities, there will be a few large networks instead of several small ones.Will there be only one, or will there be competing networks? Two factors to consider:

  • With only one network, there is less product differentiation, so competition will be more intense.
  • But a larger network give more benefits on users, thus increasing willingness to pay and price.

1.7 Policy

  • Laws imposed by government to promote fair market competition
  • Generally policies restricts merger and acquisitions that hamper or restrict competition in the market
  • Competition among sellers gives consumers lower prices, higher-quality products and services, more choice, and greater innovation.

IP policy

  • Competition policy
  • Regulation
  • Antitrust

Electronic commerce

  • Contracts
  • Privacy