1 / 32

MANAGERIAL ECONOMICS An Analysis of Business Issues

MANAGERIAL ECONOMICS An Analysis of Business Issues. Howard Davies and Pun-Lee Lam Published by FT Prentice Hall. Chapter 10: Network Economics and the Information Sector. Objectives: To examine the special features of ‘network’ industries

gefjun
Télécharger la présentation

MANAGERIAL ECONOMICS An Analysis of Business Issues

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. MANAGERIAL ECONOMICSAn Analysis of Business Issues Howard Davies and Pun-Lee Lam Published by FT Prentice Hall

  2. Chapter 10: Network Economics and the Information Sector Objectives: To examine the special features of ‘network’ industries To evaluate the debate over the impact of these industries on the working of a market economy

  3. Is it a New World? • Macro-economic laws suspended • growth, high output, high employment without inflation • Dot.com firms with no profits had very high valuations • BUT Shapiro and Varian (1999) • Technology changes, Economic laws do not

  4. The Information Sector has some unusual features • On the revenue side - network effects • On the cost side - sunk costs, high fixed cost very low marginal cost • Overall - “increasing returns” which might threaten the effective working of the market economy - MAYBE

  5. The Information Sector has some unusual features • Not usually covered in elementary texts • Require some new analytical tools • Analysis not really ‘settled down’ yet • Shapiro and Varian • Liebowitz and Margolis • Economides

  6. Networks • “Nodes” and “links” • in computing, in marketing, in sociology, in economics (firms or people and cables or radio signals) • Network effects • the value of a network product increases as more are connected to it, or use it

  7. Network Effects may lead to Externalities • Externality - a cost or a benefit which is not taken into account by the decision-maker • pollution - a negative externality • vaccination - a positive externality • the benefit others get when I join a network or use a standard product - a positive externality • Externalities lead to ‘market failure’ but the problem may be resolved by ‘internalising’ the externality - perhaps through ownership

  8. See Liebowitz and Margolis MB=MR Marginal Cost • Figure 19.1 MC* AB =AR P* No of participants Q Q*

  9. A Demand Curve for a Network Can Be Derived • See p.402 • Under perfect competition the network is ‘too small’ • Under monopoly , smaller and more expensive • Under Cournot competition, with one standard, varies between the two above

  10. Choice of Standards • autarky value • synchronisation value • total value • supply price • net value • the ‘tipping point’ - X

  11. Choice of Standards • Figure 19.3a Synchronization Value Total Value Autarky Value 0% in Format A 100% in Format A

  12. Choice of Standards • Figure 19.3b Total Value Supply Price Net Value 0% in Format A 100% in Format A

  13. Choice of Standards • Figure 19.4 Net Value for B Net Value for A Total Value Supply Price Net Value X 0% in Format A 100% in Format A

  14. Choice of Standards • Note that if different consumers have different X’s multiple standards may be an equilibrium • Multiple standards will also arise if the supply price slope is greater than the synchronisation value i.e downward sloping net value curve for A

  15. Choice of Standards • Can an inferior standard dominate? • If one standard is STRICTLY SUPERIOR preferred to another at all divisions of the market, the superior will prevail • If one standard is WEAKLY superior i.e. A is preferred to B when both have z% market share, A will dominate

  16. Choice of Standards • An inferior standard might dominate in the following situation; • A is weakly preferred to B by all customers, whose switch points are between 10% and 30% (some will prefer A if it has only 10% share, some don’t prefer A until it has 30% share) • if A has less than 10% everyone prefers B • see Figure 19.5 • if the better standard enters first, it dominates. The owner of the inferior standard can only take over if 87.5% of customers can be shifted • if the inferior standard arrives first, it dominates, but the owner of the superior standard only has to persuade 12.5% of customers to shift

  17. Choice of Standards • Figure 19.5 Share of A in new sales 0% 10% 12.5% 30% Share of A in purchases to date

  18. Other Results on Standards • What decides whether a firm adopts a standard when a number are available? • Size of extra benefit to customers from the firm joining - affects ‘new member’ and existing members in same direction • The size of the ‘coalition’ being joined - numbers already using the standard • The increase in competition within the coalition • THE LAST TWO WORK IN OPPOSITE DIRECTIONS AND DEFINE AN EQUILIBRIUM • Also the cost of compatibility relative to extra profits earned • If cost of compatibility is less than extra profit 100% compatibility will be achieved, but not otherwise

  19. A Monopolist Invites and Helps Entrants? • Intel licensed its technology to AMD, creating a competitor - WHY? • Because Intel’s sales depend on customers expectations of ‘how many people will buy this?’ • People know that monopolists restrict output so licensing someone else increases the volume of sales

  20. The Cost Side • High fixed costs, which are also sunk costs • ‘first copy’ costs • promotion costs • Very low marginal costs • Easy ‘scalability’ - no natural limits to output

  21. Consequences of This Cost Structure? • With identical products, price is forced down to MC - Bertrand competition • No viable ‘business model’ without price discrimination or product differentiation • Price discrimination: • personalised pricing - first degree p.d e.g.Lexi Nexis • third degree - different prices by group

  22. ‘Versioning’ • Delay • Complexity and Power of the Interface • Convenience • Image Resolution • Speed • Flexibility • Features • Annoyance • Technical Support

  23. How Many Versions? • How many identifiable markets? • The ‘Goldilocks’ approach • consumer psychology -‘framing’ choices affects the choices made -prospect theory • with a cheap/medium choice buyers chose cheap • with a cheap/medium/expensive choice most chose medium • Bundling - Microsoft Office

  24. Lock-In • Switching costs create lock-in • CDs to minidisk • printers which work with only one type of PC • training to use a new approach • changing mobile phone numbers (if no portability of numbers) • Lock-In creates profits because price can be raised above MC

  25. How Can I Create Lock-In? • contracts • durability • specific training • formatting information • be the sole supplier with the capability • search costs • loyalty programmes - air miles

  26. Increasing Returns: The Biggest Issue of All • Market economies fail, just as we reach the ‘End of History’ • Scale Economies are the Simplest Example • Network effects and Lock-In mean that History Matters and there is Path Dependence • Markets may ‘Lock-In’ inferior products • Firms Acquire Monopoly Positions and the market fails • IS THIS TRUE?

  27. Arthur and David’s Argument

  28. But Is It True? • If there is a superior standard it will pay the owner to induce the first sales • lease it with cancellation option • get a ‘high profile’ early adopter to influence others • bribe early adopters • advertise • give distributors incentives

  29. Example 1: The QWERTY Keyboard • QWERTY was designed to be inefficient in the 1890s • Because of the network effects and lock-in we still use it • There are better keyboards, e.g. Dvorak • BUT THIS IS A MYTH!

  30. Example 2: Word/Excel/Money • Wordprocessing was dominated by Wordperfect • Spreadsheets dominated by Lotus 1-2-3 and then QuattroPro • Both failed to adjust to GUI/Windows and to integrate: Office is a better product! • Microsoft Money does not dominate so ownership of Windows does not give guaranteed leverage

  31. Some Sceptical Questions About the Basics • The value of a network or a standard increases as more participants join • but does it always? Standard economic logic predicts decreasing returns - the most valuable links comefirst successive links are lessvaluable • Marginal cost is almost zero and ‘scalability’ is huge • but what if complementary products needed?

  32. Is It Really So Different? • When we eventually get the analysis right will we find that the network economy and information products are really just like everything else?

More Related