Week 6 Econ 106T
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This 4 page Class Notes was uploaded by Jacqueline Ho on Friday November 6, 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 10 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: 11/06/15
Information Rules Ch. 7: Networks and Positive Feedback - Information economy is populated by temporary monopolies and is unstable - Old economies were driven by economies of scale, new economy (information) by economies of networks - Positive feedback makes the strong grow stronger and the weak grow weaker - Value of connecting to a network depends on number of other people already connected to it o Network effects/ externalities, demand-side economies of scale o Bigger is better - Positive feedback in market leads to extremes -> dominance by one firm or technology o Tippy market - Negative feedback: strong get weaker, weak get stronger o Industrial oligopolies o Balanced equilibrium rather than 1 winner, oligopoly rather than monopoly - Virtuous cycle of growth can become vicious cycle of collapse - S-shaped curve of new technology : (1) flat during launch, (2) steep rise during takeoff as positive feedback kicks in, (3) leveling off as saturation is reached o Logistic curve - Supply-side economies of scale: larger firms tend to have lower unit costs o Ran into natural limits and negative feedback took over - In information economy, positive feedback is based on demand-side, not just supply - success and failure driven by consumer expectations, luck, and underlying value of the product - loser doesn’t necessarily depart - Metcalfe’s Law: the value of a network goes up as the square of the number of users 2 o nX(n-1) = n – n - to introduce new, incompatible technology into the market, build network size by overcoming the collective switching costs of all users - not all need large network effects o not all markets have positive feedback - if your market is winner-take-all, may need standardization for market to take off at all - deal with problem of consumer inertia by (1) evolution strategy of compatibility or (2) revolution strategy of compelling performance o evolution strategy offers consumers an easy migration path, reducing switching costs so customer can gradually try the new technology must overcome technical and legal obstacles use creative design, think in terms of the system, consider converters and bridge technologies o to succeed with revolution: rule of thumb, offer a product 10 times better - your reward = total value added to industry X your share of industry value o between openness and control, work to maximize the value - build alliances to ignite positive feedback in the network economy 1. introduce new, incompatible technology where vendor retains strong proprietary control 2. offer new and improved technology compatible with their existing technology, but is proprietary 3. new product supplied by many and requires little by way of switching costs 4. new product/technology incompatible with existing technology, but available from multiple suppliers Information Rules Ch. 8: Cooperation and Compatibility - coopetition = tension between cooperation and competition prevalent in network industries - identify natural allies early in the game - when negotiating standards, beware of companies that deep down have no interest in development of a successful standard o even if want standard, may disagree over how extensive/detailed that standard should be - standards enhance compatibility, or interoperability, generating greater value for users by making the network larger 1. share info with larger network 2. ability to share data attracts consumers - standards reduce the technology risk faced by consumers - if a standard is truly open, there’s less concern about lock-in and can count of future competition o shift from early battle for dominance to later battle for market share, compete within market o consumers seek more detailed standards than do suppliers - incentives to differentiate by developing proprietary extensions while maintaining some degree of backwards compatibility - standards shift locus of competition from systems to components o firm offering superior total package stands to win o specialists tend to thrive in mix-and-match environment created by interface standards o generalists and system integrators tend to thrive in absence of compatibility - consumers generally welcome standards – don’t have to pick winner or risk being stranded o enjoy greatest network externalities in a single network or interconnected o mix and match components; less likely to single-vendor lock-in o loss of variety, less aggressive pricing (competition) - sellers of complements welcome standards as long as their products comply with the standards - product standards for new technologies can pose a grave threat to established incumbents 1. can try to deny backwards compatibility to would-be entrants 2. can rush to introduce its own new generation of equipment 3. ally itself with the new technology o an incumbent with little to offer will have more interest in sabotaging new standards - companies developing new technology collectively tend to welcome standards, which increases market size and emergence o level the playing field between big and small suppliers - standard should be “open”, with no one or few firms controlling the standard 1. don’t automatically participate in formal standard-setting process 2. keep up your momentum 3. look for logrolling opportunities 4. be creative about cutting deals 5. beware of vague promises 6. search carefully for blocking patents 7. consider establishing an installed base preemptively - build an alliance in support of a new standard - try to shift risk of failure to a large customer, or the government - with standard, two fundamental threats: 1. Who’s in charge of setting the direction? 2. Who invests resources for improvement? o Open standards prone to splintering or fragmentation Multiple, incompatible versions of a standard technology Information Rules Ch. 9: Waging a Standards War - Standards war – when 2 new incompatible technologies struggle to become a de facto standard o End in truce, duopoly, or death o Unique to markets with powerful positive feedback - Rival evolutions – both your and rival’s technologies are compatible with older, established technology, but incompatible with each other - Evolution vs revolution – yours offers backwards compatibility, other doesn’t - Revolution vs evolution – vice versa - Rival revolutions – neither technology is backwards-compatible - Win standards war with 7 key assets : 1. Control over an installed base of users 2. Intellectual property rights 3. Ability to innovate 4. First-mover advantages 5. Manufacturing abilities 6. Strength in complements 7. Brand name and reputation o If own these assets, your value-added to other players is high - Two basic marketplace tactics to employ to win standards war: 1. Preemption 2. Expectations management - After winning 1. Stay on your guard 2. Commodize complementary products 3. Compete with your own installed base 4. Protect your position 5. Leverage your installed base 6. Stay ahead - Can “recover” by protecting your niche, or go for leadership at next generation of technology o Can try adding adapters or interconnecting with a larger network o Survival pricing – cut price to spur sales (shows weakness, not recommended) o Legal approaches (sue)