1. Chapter 11 The information economy David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith

2. 11.1

3. 11.2 Use of the internet

4. 11.3 e-products n An e-product: – can be digitally encoded then transmitted rapidly, accurately and cheaply á e.g. music, films, books, sport … n Fixed costs of producing e-products are huge … n … but marginal costs of distribution are tiny n implying vast economies of scale

5. 11.4 Consuming information n experience n overload n switching costs n network externalities Four key features of e-products:

6. 11.5 Experience products n An experience good or service is one that must be sampled before the user knows its value – information is nearly always new – marketing needs careful attention n free samples n previews n establishing reputation

7. 11.6 Information overload n … arises when the volume of available information is large n …but the cost of processing it is high n screening devices become crucial

8. 11.7 Switching costs n … arise when existing costs are sunk n so changing supplier incurs additional costs n smart suppliers devise strategies for locking in their customers á e.g. air miles, supermarket reward cards

9. 11.8 Network externalities Suppose D 1 represents the demand curve for a product exhibiting network externalities £ Quantity D1D1 P1P1 Q1Q1 With price at P 1, demand is limited. If price is reduced to P 2, more people find the network attractive so not only is there a move along the demand curve, but there is a shift in demand. Long-run demand is more elastic (DD). P2P2 D2D2 Q2Q2 D D

10. 11.9 Information: the supply side n Given substantial economies of scale, we expect monopoly suppliers of information products: n Dominant firm with competitive fringe á e.g. Microsoft n Niche market monopolies

11. 11.10 Pricing information products n Strategies for pricing information products: – two-part tariff n an annual charge to cover fixed costs, and a small price per unit related to marginal costs – versioning n the deliberate creation of different qualities to facilitate price discrimination – bundling n the joint supply of more than one product to reduce the need for price discrimination

12. 11.11 Competition vs. collaboration n A strategic alliance is a blend of co-operation and competition, in which a group of suppliers provide a range of products that partly complement one another – e.g. Microsoft and Intel – airline alliances: One World, Star

13. 11.12 Understanding the e-economy n 1 The information revolution is changing our lives – but few of its activities or market tactics are unprecedented n 2 The revolution in technology has not required a corresponding revolution in economic theory