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Economics of Information

Economics of Information

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Economics of Information

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  1. Economics of Information Recognizing Lock-In

  2. Lock-In • The information age creates a “friction free” economy • Is this true? • Greater dependence on technology • More skilled labor – specialized skill sets • Captive consumers are your greatest asset! Economics of Information - Mike Shor

  3. Examples of Lock-In • Evergreen Contracts • Change frame of reference for consumer • Magazine subscriptions • BMG music club • DurableVCRs • BetaMax vs. VHS – positioned to profit? • Brand-Specific Training in Data Mining • Oracle vs. Sun • Database Storage • planned obsolescence of media and drives • Iomega Zip Drives and Disks Economics of Information - Mike Shor

  4. Inconvenience Old supplier New supplier Technologicalbarriers Switching Costs Economics of Information - Mike Shor

  5. Lock-In Cycle Brand Selection Sampling Lock-In Entrenchment Economics of Information - Mike Shor

  6. Consumer Rationality • Decisions made today limit future options • Future options have option value • Current decisions have investment value • Will consumers give up option value without gaining more investment value? • Principles: • Supplier wants to lock-in customer • Customer wants to avoid lock-in • Example: e-Mail forwarding Economics of Information - Mike Shor

  7. Lock-In:Consumer Barriers • Technological Barriers • E.g. Microsoft Windows and Netscape • Technological Advantages • E.g. Installed Base • Inconvenience Barriers • Contractual costs of switching • Inconvenience Advantages • Loyalty programs Economics of Information - Mike Shor

  8. Small Switching Costs • Important issue is not the size of the switching costs, but relative size • Per-customer basis • Relative to advantages of switch • Microsoft Word vs. Note Pad • Phone service vs. Email service Economics of Information - Mike Shor