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Week 3

by: Jacqueline Ho
Jacqueline Ho
GPA 3.6
Economics of Technology and E-Commerce
Simon Board

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About this Document

Week 3 lectures and readings.
Economics of Technology and E-Commerce
Simon Board
Class Notes
week 3 106t economics technology ecommerce e-commerce
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This 8 page Class Notes was uploaded by Jacqueline Ho on Saturday October 17, 2015. The Class Notes belongs to Econ 106T at University of California - Los Angeles taught by Simon Board in Fall 2015. Since its upload, it has received 28 views. For similar materials see Economics of Technology and E-Commerce in Economcs at University of California - Los Angeles.

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Date Created: 10/17/15
Week 3 Information rules Ch 2 LongtaH A World of Hits TED Talk Targeting NYT The Economics of Internet Markets Week 3 Lecture 1 October 13 Netflix having exclusive content differentiates them 0 disruptive technology 0 Hoteing model and how it connects to Netflix amp Hulu s need to differentiate I avoid price competitionwar Multihoming using multiple platforms Twitter case 0 valuation pi1 pi21r pi31rquot2 Barriers to Imitation Classical 1 Physical access to resources literal scarcity legal restrictions privileged access to buyers or suppliers 0 eg how Apple bought 2 years production of Sony s microchips 2 Economics not profitable to imitate Barriers to Imitation Managerial 1 Perception gt manager doesn t know they re behind 2 Inspiration gt manager doesn t know what to do to copy 3 Motivation gt manager doesn t want to do anything about it no good incentives 4 Implementation gt manager can t fix organization may need restructuring lmmobility if perfectly mobile resources extract all the rents FIFA has exclusive agreement with EA for soccer videogames o Shortrun because contract can be bid away 0 not sustainable depends on o contractibility I If you buy all the chefs of a restaurant do you get the restaurant s reputation o de nabHHy o complementarity with other assets Halo franchise is it sticky Does it help other products 0 many things can determine sustainability Sustainable Advantage 1 Firstmover advantages many barriers to imitation may suggest this Latemover advantages when firstmovers are guinea pigs 2 Coherent strategies Porter sustainable strategies rest on doing many interlocking activities with fit Systems of activities are hard to imitate Reinforce the old rather than add something completely new for value Apple isn t the firstmover nor the latemover but is the first to define markets and when it moves it goes allin 1 be responsive don t have to be first as long as you can be a fast follower 2 buy startups or enter market within months not years 3 Core competencies a small number of key assets or capabilities define a firm s competitive advantage goo9 different from Porter by focusing on a few key things in the end deepen your advantages Tech Industries Can apply Porter s 5 forces amp comparative advantage to any firm Firms are different in o reproducibility 0 degree of variety 0 customizability 0 search and attention Information goods are costly to produce and cheap to reproduce CD phonebooks eventually became a commodity and had no capacity restraints Firm A charges 200 B charges 190 C 180 until it went down to marginal cost and ended at all being 20 Two Business Models 1 Differentiate 2 Be the dominant firm the only firm lowest cost Week 3 Lecture 2 October 15 Longtail Distribution of demand follows power law 0 Frequency is approximately inversely proportional to rank I Prr 01r r rank 0 Distribution has a fat tail with lots of mass Number Book Sales Rank of sales quotPower law quotPareto distribution I l Rank Airports Amazon Barnes amp Nobles Sorting information with more info need better organization and filtering Squeezing the middle while big are getting bigger small get bigger o Fragmentation due to long tail and falling costs of production and distribution 0 Consolidation people want to share the same culture technology helps distribution increases role of brands I More monetization methods ads production lines increased distribution channeB Firstmover advantage May deter future entry 1 Build capacity to respond to a threat lockin customers network have more capacity than needed 2 Limitentry pricing price low to prevent entry signal that one is tough and get customers 3 After entry play tough scare off the first entrant get reputation and prevent future entry Cost or Benefit Leadership Raise benefits with technology Information Goods 1 Product Customization 0 Can use online info demographics observations to customize experience 2 Content Creation 0 Users can design their own experience Vine Craigslist WordPress 0 Crowdsourcing Wikipedia Kickstarter open software design 0 Business model provide toolkit amp structure for people and interaction between people 3 Reproducibility and Property Rights 0 Info is a public good nonrivalrous little to no physical cost of reproduction o Exclude people from info with patents copyrights trade secrets etc I Reduces consumption and welfare I Rents to welfare encouraging innovation I Lowers subsequent innovation 0 Hard to enforce with online economy I Perfectly reproduce and instantly transmit around world 4 Experimentation and Adaptation o Experimentation online easy to run controlled experiments refine pricing and matching 0 React to competitors and world changes 5 Platforms and Market Design 0 Platforms control many aspects of exchange I Online firms have lots of info about customers can control their knowledge of product and market Week 3 CaseZLab Advertising can help business growth eg Facebook Google Yahoo Be constant on what your product is don t waver 0 Twitter talks about growth change etc so it s hard to say what exactly Twitter is Can you build a business on the haphazard pulses of realtime events 0 Not easily sustainable Value of any network square of the nodes N n2 Generally for technology business the switching costs are the network effects Ads for Twitter S users engagements CPE cost per engagement 4 0 Engagements are decreasing how can Twitter make a profit Information Rules Ch 2 Pricing Information 1 Information is costly to produce cheap to reproduce 2 Once first copy of an information good has been produced most costs are sunk and can t be recovered 3 Multiple copies can be produced at roughly constant perunit costs 4 No natural capacity limits for additional copies Cost of production of information goods is dominated by quotfirstcopy costs 0 Once first copy is out cost of another is far less especially over network 0 Substantial economies of scale more produced gt lower average cost of production With technology increases cost of distributing info is falling so firstcopy cost is a greater fraction of total costs than before Dominant part of fixed costs sunk costs not recoverable if production is halted o Eg film flops no market for its script 0 Generally paid upfront before commencing production Marketing and promotion costs are also big costs for information goods Variable costs of information production doesn t increase for additional copy even if many are made 0 No appreciable and lasting capacity constraints 0 Copies are free for producer and consumer Markets can t and won t look like textbookperfect competitive markets with many suppliers of homogenous products lacking the ability to influence prices 0 quotinformation auctions work for goods in fixed supply like stocks and airline seats but not for goods with incremental cost of production near 0 Once several firms have sunk the costs necessary to create a product competitive forces tend to move price toward marginal cost towards 0 0 Information commodity markets don t work 0 No natural floor after sunk costs except cost of producing and distributing Two sustainable structures for an information market 0 Dominant firm model might not have best product but due to size and scale economies it enjoys a cost advantage over smaller rivals eg Microsoft 0 Differential product market many firms with the same quotkindquot of information but different varieties eg film TV publishing Mix of the two models in software markets differentiated products amp disparate market shares Basic strategy 1 differentiate product to add value 2 achieve cost leadership in dominant firm industry through economies of scale and scope 0 Want to price products in ways that max their value Don t let your information product become a commodity gt differentiate Can try to assert intellectual property rights to protect information commodities f hard to differentiate can sell high volume to lower average cost gt but need to lower price if increase quantity 0 Need distribution skills marketing expertise channel control Key to reducing average cost in information markets is to increase sales volume through reuse and resale Best way to secure leadership position is early presence in market and forwardlooking approach to pricing Even if differentiation is difficult or limited incumbent info providers are well placed to adopt a cost leadership position so long as not rigidly wedded to their historical pricing practices Due to strong economies of scale market leader often tends to be the cost leader A twopronged approach for leader to make money 0 Don t be greedy I Limit pricing set prices high without encouraging others to invest the sunk costs necessary to enter market I Aggressive pricing today slowsprevents entry tomorrow by taking some customers out of market I Sales today reduce demand for similar info in future or lock in customers 0 Play tough send a credible signal that entry will be met with aggressive pricing I Only do price wars if think you can win I Eliminate rival and establish reputation as a formidable opponent Migrate incumbency and scale advantages into valueadded aspects of info After creating unique source of info and avoiding commodization o Personalizecustomize your product to generate the most value for customers eg Facebook ads 0 Establish pricing arrangements that capture as much of that value as possible Know your customer in order to personalize product 0 Registration and billing to get demographic info I Use promotions offer valuable services in return 0 Observation for behavior eg searches I Monitor searches monitor quotclickstreamquot sequence of actions they take while visiting your site WP PWP PWP I because clickstream has a lot of data and is quotconnectionlessquot need cookies or store info serverside if information product is highly tuned to customers interests will have lots of pricing of flexibility with quotpointtopoint technology or quotonetoone marketing or quotfirstdegree price discrimination can sometimes arrange for multiple or even personalized prices Price discrimination levels personalized pricing sell to each user at a different price versioning offer a product line and let users choose version appropriate to them group pricing set different groups of consumers eg student discount more and more companies acquiring capability to track inventory in real time and adjust prices just as fast promopricing offering sales closeouts easy online since prices can be changed instantaneously personalized pricing personalize your product and pricing know your customer differentiate prices when possible use promotions to measure demand 0 thirddegree group price discrimination reasons price sensitivity in different groups network effects lockin sharing inconvenient for only one user need multiple as more material becomes available online differential international pricing will become more difficult but can try to localize info and differentiate the product 0 allows selling to a larger market and prevents inexpensive foreign sales from cannibalizing domestic sales network effect arises from desire for standardization within an organization 0 generally base pricing on dimensions that re most closely correlated with value of software to the enterprise I variety of pricing menus lockin 0 get them while they re young student discounts o if good has big switching costs pays to offer deep discounts to get customer quotaddictedquot to product quotsharing arrangements include site licenses academic journals selling high to libraries and low to individuals 0 quotinformation intermediaries library video store Transaction costs determine whether it s better to sell or rent info By offering product for sale and for rental producer can segment the market Analyze and understand how much you invest in producing and selling your info for long run strategy If forced to compete in a commodity market be aggressive but not greedy Differentiate your product by personalizing the info and price Invest in collecting and analyzing data about your market using focus groups statistical analysis promos and other marketing techniques cheaper experiments on internet Use info about your customers to sell them personalized products at personalized prices Analyze profitability of selling to groups 0 Price sensitivity desire for standardization repeat use market segmentation considerations Profiting from Obscurity quotLong tail shift from mass markets to niche markets as ecommerce aggregates and makes profitable what were previously unprofitable transactions Collective demand for obscure items is very large growing and can be aggregated over the Internet so selling obscures can be just as good as selling popular Opening previously unpopular niche markets 0 increases overall demand 0 shifts some demand away from hits Recommendations and quotcollaborative filtering where purchase histories are analyzed to Work out what else is likely to interest the buyer of a particular product Accelerate decline of shared culture market fragmentation Address niches to be successful A World of Hits Chris Anderson said demand for media would move from distribution head to the long tail and the few products that sell a lot would lose to the many that sell modestly However audiences are both fragmenting into niches and consolidating around blockbusters o the quotmiddle ground is becoming ignored broadcast TV has decreased in audience share but advertisers are paying more for this quotstable massmedium hits are carried along by illinformed goodwill more choice is not equal to opting for obscure entertainment quotjoke answer churn out more hits 0 Hits make more money take advantage of protective power of brands to carry the smallmedium nonhit products 0 or charge more money for smalls amp mediums to rescue them II Chris Anderson TED Talk four key stages of any viable technology 1 critical price right price when it drops below the critical price 2 gaining market share 3 displace an established technology 4 become ubiquitous As it approaches 4 premium names get cheaper while the lesserknowns rise a little in price Approach free price 0 New York Times Targeting Threestep habit loop 1 cue to do the habit trigger the automatic habit 2 routine 3 reward It becomes more automatic gt craving The Economics of Internet Markets Internet facilitated creation of new markets 0 improved measurement increased customization rapid innovation increased conscious market design Internet makes possible and costeffective to operate markets with millions of participants and products globally Ability to customize individual experiences derived from low cost of information and captured market data 0 Easy to test ideas and make changes in response 0 Rapid innovation Network effects gt platforms compete to attract users Internet reduces many traditional costs associated with organizing markets 0 Easier to visit online market search for trade update info capture and utilize data Most platforms designed to scale at relatively low cost Increasing returns from network externalities investments experiments Reducing costs of customization also reduces cost of adaptation over time Large extent to which platforms can control different aspects of exchange search transactions 0 Internet markets often involve more conscious and detailed market design than traditional marketplaces Platforms should subsidize users who create value for other users Competition can be asymmetric platforms have incentive to compete aggressively for single homing users but then enjoy a monopoly over these users when setting prices for the multi homing side of the market Payyourbid auction is problematic because bidders offer minimum increments in increases Generalized Second Price GSP auction with bidder k paying k1 highest bid 0 loses some appealing properties when there s uncertainty about bidder values or residual supply Standardization quotconflationquot addresses adverse selection and thin markets reduced competition which are problems from excessive targeting Returns to being the low price seller are very high because demand falls off sharply with the seller s position Auction provides effective means to sell with high probability by setting low reserve price while ensuring buyer competition and price discovery


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