information rules book review

8/11/2019 Information Rules Book Review

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BOOK REVIEW

INFORMATION RULESA Strategic Guide To The Network Economy

Carl Shapiro

Hal R Varian

Group -9


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Business Strategies opted by companies in Information

technology business & Network economy.

This book covers

Information economy

Pricing Pol icy in Information economy

Patent & Copyr igh tmanagements

Identification & managing of locking- in of customers &

suppliers

Pos it ive Feedback& creating insta lled cus tomer base

Concept of standard-r ich environment

Rules & Policies of FederalsAnt i t rust Law


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The

Information

Economy

1


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Information

Application of economics in the economy (simple calculations do not

work)

Interconnection battles (phones during early era)

What is information (anything that can be digitized)

Cost of producing information (high fixed, low marginal costs)

Managing Intellectual property (Hollywoodrental example)

Information as an ExperienceGood(Eg: Newspaper for 2 Rupee)

The economics of information (pricing, timing)


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Technology (Infrastructure)

Systems competition (hardware dependence of IT, compatibility eg:

Microsoft & Intel)

Lock-in & switching costs (Eg: apple to windows)

Positive feedback, Network externalities and standards (large user

base, becomes prevalent etc.; Eg: whatsapp, adobe PDF)

Policy (effect of policies to prevent monopoly)


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Pricing

Information2In formation is co st ly to prod uce but cheap to reproduce


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MARKETSTRUCTURE

DOMINANT FIRMMODEL

DIFFERENTIATEDPRODUCTMARKET

COMPETETIVESTRATEGY

DIFFERENTIATEPRODUCT

ACHIEVE COSTLEADERSHIP

These classic

descriptions are as

valid as they ever

were

Personalized pricin

VersioningGroup Pricing

Pricing Information

Technology changes. Econom ic Laws Do N


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Versioning

Information3Information is like an oyster: it has its greatest value whe


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Designing product line to capture the greatest profit from the information

product.

Two basic principles

Offer version tailored to the needs of different customer

Self-SelectionLet the customer reveal the value (Hard cover vs. paper back

Adjusting the characteristics Creating versions based on customer may

have some difficulties (customer survey) so its better to adjust the

characteristics' of information product to emphasize differences in what

customer values.Versions that have differential appeal to different groups,adjusting the price if necessary.

Dimensioning : Products may be versioned along a variety of dimensions:

Delay, user interfaces, image resolution, speed of operation, format,

capability, features, comprehensiveness, annoyance and support are some

examples

Inducing Self Selection


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Segmentation :Design Product based on market segment. If market

segments naturally, Design product line to match or else choose three

versions and plan to make most of your money off the middle version.

Control User Interface : Free version will run for 2 hours, Low version

supports only 256 tag points..and the highest is unlimited

Bundling :: If there is no variation in willingness to pay better strategy

to bundle: combining complementary goods increases revenue, if itdecreases the variation across customers in their willingness to pay.

Nonlinear pricing : Let consumer builds their own bundles. Quantity

discounts can increase usage and revenuefrom single user license to

enterprise edition

Promotion : If promotional pricing make sense, it can be used to

segment the market. Promotions can be designed to get different

responses from different type of customers. Such Targeted promotions

help support versioning.


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Rights

Management4


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1. Quickly, easily & cheaply

Distribution

2. Lower cost of making

copies

Give away

free

samples to

sell more

Selling

complementary

products

Demand for

repeat views

Similar but not

identical

products

Copy Protection Schemes

Trusted systems, cryptographic envelopes but unlikely to play significant

role in mass-market information goods because of standardization

problems and competitive pressures

Fundamental Trade-off Between Control & Customer Value

More Liberal Terms - Higher value of productMore Revenues

- Higher copying & sharingLess sales

Trick is to pick th e terms and co ndit io ns to m aximize the value of

you r intel lectual prop erty, no t to maximize the protect ion .

Documents, music &

video

Digital Technology Poses Two Challenges

Opportunities to advertise products to

increase sales

Opportunities to make illegal

copies


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Recognizing

Lock-In5


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Managing

Lock-In6


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16

Three basic lessons for purchasers of information systems and

technology:

Bargain hard before you are locked in for concessions in exchange for

putting yourself in a vulnerable position

Pursue strategies like second sourcing and open systems to minimize

the extent of your lock-in.

Look ahead to the next time you'll be picking a vendor, and take steps

at the outset to improve your bargaining position at that time

Strategies for sellers whose customers will experience lock-in

Be prepared to invest to build an installed base through promotions

and by offering up-front discounts.

Cultivate influential buyers and buyers with high switching costs.

Design your products and your pricing to get your customers to invest

in your technology, thereby raising their own switching costs.

Maximize the value of your installed base by selling your customers

complementary products and by selling access to your installed base.


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Networks And

Positive

Feedback

7


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Positive Feedback - The stronger gets stronger and the weaker

keeps getting weaker.

The S Curve:

Demand side economy scale

Networks

Positive feedback an advantage to the larger network

Consumer expectation 4 Generic Strategies :

1> Performance Play 2> Controlled Migration

3> Open Migration 4> Discontinuity


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Cooperation

And

Compatibility

8


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Competition in network markets.

Standards altering competition

Opportunity to build alliance

Support to spread the word of your new technology

Managing open standards


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Waging A

Standards

War9


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Self / Rival Compat ible Incompat ible

Compat ib le

Rival Evolution

(DVD & DivX for running

CDs)

Evolution vs. Revolution

(Spreadsheet-LOTUS 1 2 3 vs.

Excel)

Incompat ible Revolution vs. EvolutionRival Revolution

(AC & DC in electrical system) War Tactic s:

Preemption

Early leads for positive

feedback

&

Aggressive (Penetrative)

Pricing Mechanism

Expectat ions management

Vaporware

&

strong sentiments on Product through

Allies

Assets in Wars:

Intellectual Property rights, Manufacturing abilities

Innovation abilities, Developingcomplementary product Reputation & Brand name Installed

Customer Base

, Words of caut ion: Post winning war

Rear guardin g If falling behind, target market nicheAvoid Surv ival Pr ic ing Survival Pricing backfires & it shows weakness

in position


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Information

Policy10


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Rules & Laws:Against

Merger & Acquisition

Cooperationamong rivals &

Lock-inof Customers & Suppliers

Companies need not fear of antitrust law if:

Cooperation sets standards that will benefit customers on quality &

pricing

M&A provides better technologies at cheaper prices

Pricing policy, Product Bundling, Distribution practices & contracts

with Customers & suppliers are visible & can be audited easily. Government Pol icy Drawback:

Too much competition not desirable, FC for production is very high

Product differentiation is questionable only if it reduces competition,actually it helps to serve less privileged markets

Lock-in is obvious because of High switching cost, products work in

system

Customer base get installed because of product, technology &

service satisfaction


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Conclusion


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Economic theories dont change only the application

Theories explained are not specific to Information economy; these are

equally relevant in other businesses

Goal of businesses & Government policies should be to increase socialwelfare not the profitability of firms

In an open economy, policies must not favor laggards & block forwards


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Thank You!!