Summary of Information Rules by Shapiro and Varian

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Information Rules
1 The information Economy
Tech changes, economic laws do not.
INFORMATION
Information – anything that can be digitized.
Info has an unusual cost structure. Costly to create and assemble. Costly to produce but cheap to reproduce. High fixed costs but low marginal costs. When managing intellectual property, goal should be to maximize the value of your intellectual property, not its protection. Experience good – must be experienced in order to be valued. Information is always an experience good. Browsing sure, but branding and reputation is how many producers overcome the experience good problem. The internet is a hybrid between a broadcast medium and point to point medium. TECHNOLOGY

Improved information infrastructure has vastly increased our ability to store, retrieve, sort, filter and distribute information, thereby greatly enhancing the value of the underlying information itself. Traditional rules of competitive strategy focuses on competitors, suppliers and customers. In the info economy, companies selling complementary components, or complementors, are equally important. If you sell a component of a system, you can’t compete if you’re not compatible with the rest of the system. Firms must focus also on their collaborators. Switching costs (LP to DVD for example). Lock-in arises whenever users invest in multiple complementary and durable assets specific to a particular information technology system. Network externalities/network effects – the value of a product to one user depends on how many other users there are. These technologies tend to exhibit long lead times followed by explosive growth. Positive feedback as the user base grows, and eventually reaches critical mass and takes over the market. Therefore growth is a strategic imperative, and popular systems enjoy a large competitive advantage over less popular systems. Consumer expectations are critical – the system expected to become standard often becomes the standard. So expectation management is important, when network effects are strong product announcements can be as important as the actual introduction of products. The timing of strategic moves is even more important in the information industry. Compatibility issues.

Another method for achieving critical mass is to assemble a powerful group of strategic partners, they can be customers, complementors or even competitors. POLICY
Antitrust laws shouldn’t be more of a problem in the info industry than otherwise… HOW WE DIFFER
No trends, models. No analogies, analysis…
2 Pricing Information
Encyclopedia Britannica story.
THE COST OF PRODUCING INFORMATION
The high fixed and low marginal costs of information lead to substantial economies of scale – the more you produce, the lower your average cost of production. The dominant component of the fixed costs of info production are sunk costs. In addition, marketing and promotion costs loom large for info goods. The variable costs of info production also have an unusual structure: the cost of producing an additional copy typically does not increase. The first-copy costs common to info goods are the extreme version of what we see in other industries where scale economies are powerful. COSTS AND COMPETITION

So far we’ve seen that:
* Information is costly to produce but cheap to reproduce. * Once the first copy of an information good has been produced, most costs are sunk and cannot be recovered. * Multiple copies can be produced at roughly constant per-unit costs. * There are no natural capacity limits for additional copies. The generic information on the internet sell at marginal cost – zero. It’s natural for commodities with no natural price floor (low marginal costs) to decrease in a downward spiral. There are two sustainable structures for an information market: 1. The dominant firm model may or may not produce the best product, but by virtue of size and scale economies it enjoys a cost advantage over its smaller rivals....
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