Docstoc

Ch34

Document Sample
Ch34 Powered By Docstoc
					  Chapter Thirty-Four

Information Technology
    Information Technologies
 Computers,   answering machines,
  FAXes, pagers, cellular phones, …
 Many provide strong
  complementarities.
 E.g. email is useful only if lots of
  people use it -- a network externality.
 And computers are more useful if
  many people use the same software.
    Information Technologies
 But then switching technologies
  becomes very costly -- lock-in.
 E.g. Microsoft Windows.
 How do markets operate when there
  are switching costs or network
  externalities?
 Competition & Switching Costs
 Producer’s  cost per month of
  providing a network service is c per
  customer.
 Customer’s switching cost is s.
 Producer offers a one month
  discount, d.
 Rate of interest is r.
 Competition & Switching Costs
 All producers set the same
  nondiscounted price of p per month.
 When is switching producers rational
  for a customer?
 Competition & Switching Costs
                              p
 Cost of not switching is p  .
                              r
 Competition & Switching Costs
                              p
 Cost of not switching is p  .
                              r
                                p
 Cost from switching is p  d   s .
                                r
 Competition & Switching Costs
                              p
 Cost of not switching is p  .
                              r
                                p
 Cost from switching is p  d   s .
                                r
                   p         p
 Switch if p  d   s  p  .
                   r         r
 Competition & Switching Costs
                              p
 Cost of not switching is p  .
                              r
                                p
 Cost from switching is p  d   s .
                                r
                   p         p
 Switch if p  d   s  p  .
                   r         r
 I.e.   if d  s.
 Competition & Switching Costs
                   p         p
 Switch if p  d   s  p  .
                   r         r
 I.e.if d  s.
 Producer competition will ensure at a
  market equilibrium that customers
  are indifferent between switching or
  not  d  s.
 Competition & Switching Costs
 At  equilibrium, producer economic
  profits are zero.
                   pc
 I.e.  pd c         0.
                    r
 Competition & Switching Costs
 At  equilibrium, producer economic
  profits are zero.
                   pc
 I.e.  pd c          0.
                    r
                                      pc
 Since d  s, at equilibrium p  c       s.
                                       r
 Competition & Switching Costs
 At  equilibrium, producer economic
  profits are zero.
                   pc
 I.e.  pd c          0.
                    r
                                      pc
 Since d  s, at equilibrium p  c       s.
                                       r
     present-valued producer profit =
 I.e.
  consumer switching cost.
     Competition & Network
         Externalities
 Individuals1,…,1000.
 Each can buy one unit of a good
  providing a network externality.
 Person v values a unit of the good at
  nv, where n is the number of persons
  who buy the good.
     Competition & Network
         Externalities
 Individuals v = 1,…,1000.
 Each can buy one unit of a good
  providing a network externality.
 Person v values a unit of the good at
  nv, where n is the number of persons
  who buy the good.
 At a price p, what is the quantity
  demanded of the good?
       Competition & Network
           Externalities
 Ifv is the marginal buyer, valuing the
  good at nv = p, then all buyers v’ > v
  value the good more, and so buy it.
 Quantity demanded is n = 1000 - v.
 So inverse demand is p = n(1000-n).
          Competition & Network
Willingness-to-pay Externalities
 p = n(1000-n)
                     Demand Curve




      0                 1000
                 n
    Competition & Network
        Externalities
 Suppose all suppliers have the same
 marginal production cost, c.
          Competition & Network
Willingness-to-pay Externalities
 p = n(1000-n)
                     Demand Curve



     c                         Supply Curve



         0              1000
                 n
    Competition & Network
        Externalities
 What   are the market equilibria?
     Competition & Network
         Externalities
 What    are the market equilibria?
 (a) No buyer buys, no seller supplies.
   – If n = 0, then value nv = 0 for all
     buyers v, so no buyer buys.
   – If no buyer buys, then no seller
     supplies.
          Competition & Network
Willingness-to-pay Externalities
 p = n(1000-n)
                     Demand Curve


         (a)
     c                         Supply Curve



         0              1000
                 n
          Competition & Network
Willingness-to-pay Externalities
 p = n(1000-n)
                        Demand Curve


         (a)
     c                            Supply Curve



         0     n’          1000
                    n
      Competition & Network
          Externalities
 What   are the market equilibria?
 (b) A small number, n’, of buyers
  buy.
   – small n’  small network
     externality value n’v
   – good is bought only by buyers with
     n’v  c; i.e. only large v  v’ = c/n’.
          Competition & Network
Willingness-to-pay Externalities
 p = n(1000-n)
                           Demand Curve


         (a)
     c                                Supply Curve
                (b)       (c)


         0     n’           n” 1000
                      n
     Competition & Network
         Externalities
 What   are the market equilibria?
 (c) A large number, n”, of buyers buy.
   – Large n”  large network
     externality value n”v
   – good is bought only by buyers with
     n’’v  c; i.e. up to small v  v” =
     c/n”.
          Competition & Network
Willingness-to-pay Externalities
 p = n(1000-n)
                           Demand Curve


         (a)
     c                                Supply Curve
                (b)       (c)


         0     n’           n” 1000
                      n
    Which equilibrium is likely to occur?
    Competition & Network
        Externalities
 Suppose the market expands
 whenever willingness-to-pay exceeds
 marginal production cost, c.
          Competition & Network
Willingness-to-pay Externalities
 p = n(1000-n)
                      Demand Curve



     c                           Supply Curve



         0   n’        n” 1000
                  n
    Which equilibrium is likely to occur?
          Competition & Network
Willingness-to-pay Externalities
 p = n(1000-n)
                            Demand Curve
             Unstable



     c                                Supply Curve



         0    n’            n” 1000
                        n
    Which equilibrium is likely to occur?
          Competition & Network
Willingness-to-pay Externalities
 p = n(1000-n)
                      Demand Curve



     c                           Supply Curve



         0             n” 1000
                 n
    Which equilibrium is likely to occur?
          Competition & Network
Willingness-to-pay Externalities
 p = n(1000-n)
                      Demand Curve
                       Stable


     c                           Supply Curve



         0             n” 1000
                 n
    Which equilibrium is likely to occur?
          Competition & Network
Willingness-to-pay Externalities
 p = n(1000-n)
                          Demand Curve
             Stable       Stable


     c                              Supply Curve



         0                n” 1000
                      n
    Which equilibrium is likely to occur?
       Rights Management
 Should a good be
    sold outright,
    licensed for production by
     others, or
    rented?
 How is the ownership right of the
  good to be managed?
        Rights Management
 Suppose   production costs are
  negligible.
 Market demand is p(y).
 The firm wishes to max p( y ) y .
                         y
    Rights Management
p



            p( y )


                     y
    Rights Management
p
            ( y )  p( y ) y

             p( y )


                        y
         Rights Management
    p
                 ( y )  p( y ) y

                  p( y )
p( y*)

           y*                y
        Rights Management
 The  rights owner now allows a free
 trial period. This causes
  – an increase in consumption
             Y   y,   1
        Rights Management
 The  rights owner now allows a free
 trial period. This causes
  – an increase in consumption
             Y   y,   1
    and a decrease in sales per unit of
    consumption
                    Y
                y .
                  
        Rights Management
 The  rights owner now allows a free
 trial period. This causes
  – increase in value to all users 
    increase in willingness-to-pay;
           P (Y )   p(Y ),   1.
    Rights Management
p



            p( y )
             P (Y )   p(Y )

                   y,Y
        Rights Management
    firm’s problem is now to
 The
            Y         Y 
  max P (Y )   p(Y )  p(Y )Y .
   Y                   
         Rights Management
 Thefirm’s problem is now to
             Y         Y 
   max P (Y )   p(Y )  p(Y )Y .
    Y                   

 Thisproblem must have the same
 solution as max p( y ) y .
                y
         Rights Management
 Thefirm’s problem is now to
             Y         Y 
   max P (Y )   p(Y )  p(Y )Y .
    Y                   

 This problem must have the same
  solution as max p( y ) y .
               y
 So y*  Y*.
         Rights Management
    p
                 ( y )  p( y ) y

                  p( y )
p( y*)             P (Y )   p(Y )

           y*                y
          Rights Management
                              
     p               (Y )  p(Y )Y
                              
                     ( y )  p( y ) y

p(Y *)                p( y )
 p( y*)                 P (Y )   p(Y )

          y*  Y*              y
                             
                               1    higher profit
                             
          Rights Management
                              
     p               (Y )  p(Y )Y
                              
                     ( y )  p( y ) y

p(Y *)                p( y )
 p( y*)                 P (Y )   p(Y )

          y*  Y*              y
                             
                               1    lower profit
                             
   Sharing Intellectual Property
 Produce    a lot for direct sales, or only
  a little for multiple rentals?
 Lending books, software.
 Renting tools, videos etc.
 Sell movies directly, or only sell to
  video rental stores, or pay-per-view?
 When is selling for rental more
  profitable than selling for personal
  use only?
   Sharing Intellectual Property
F  is the fixed cost of designing the
  good.
 c is the constant marginal cost of
  copying the good.
 p(y) is the market demand.
 Direct sales problem is to
   Sharing Intellectual Property
F  is the fixed cost of designing the
  good.
 c is the constant marginal cost of
  copying the good.
 p(y) is the market demand.
 Direct sales problem is to
         max p( y ) y  cy  F .
          y
   Sharing Intellectual Property
 Isselling for rental more profitable?
 Each rental unit is used by k > 1
  consumers.
 So y units sold  x = ky
  consumption units.
   Sharing Intellectual Property
 Isselling for rental more profitable?
 Each rental unit is used by k > 1
  consumers.
 So y units sold  x = ky
  consumption units.
 Marginal consumer’s willingness-to-
  pay is p(x) = p(ky).
   Sharing Intellectual Property
 Isselling for rental more profitable?
 Each rental unit used by k > 1
  consumers.
 So y units sold  x = ky
  consumption units.
 Marginal consumer’s willingness-to-
  pay is p(x) = p(ky).
 Rental transaction cost t reduces
  willingness-to-pay to p(ky) - t.
   Sharing Intellectual Property
 Rental transaction cost t reduces
  willingness-to-pay to p(ky) - t.
 Rental store’s willingness-to-pay is
          Ps ( y )  k[ p( ky )  t ].
      Sharing Intellectual Property
  Rental transaction cost t reduces
   willingness-to-pay to p(ky) - t.
  Rental store’s willingness-to-pay is
           Ps ( y )  k[ p( ky )  t ].
  Producer’s sale-for-rental problem is

max Ps ( y ) y  cy  F
  y
      Sharing Intellectual Property
  Rental transaction cost t reduces
   willingness-to-pay to p(ky) - t.
  Rental store’s willingness-to-pay is
           Ps ( y )  k[ p( ky )  t ].
  Producer’s sale-for-rental problem is

max Ps ( y ) y  cy  F  k[ p( ky )  t ] y  cy  F
  y
     Sharing Intellectual Property
 Rental transaction cost t reduces
  willingness-to-pay to p(ky) - t.
 Rental store’s willingness-to-pay is
      Ps ( y )  k[ p( ky )  t ].
   Producer’s sale-for-rental problem is

     max Ps ( y ) y  cy  F  k  p (ky)  t y  cy  F
       y

                   c
      p (ky)ky  (  t )ky  F
                   k
   Sharing Intellectual Property
                        c     
      max p ( ky) ky    t ky  F 
        y               k     
                      c    
      max p ( x ) x    t  x  F
        x             k    
is the same problem as the direct sale
problem max p( y ) y  cy  F
           y
except for the marginal costs.
   Sharing Intellectual Property
                       c     
      max p ( ky) ky    t ky  F 
        y              k     
                     c
      max p ( x) x    t  x  F
                           
        x            k    
is the same problem as the direct sale
problem max p( y ) y  cy  F
           y
except for the marginal costs. Direct sale
is better for the producer if c  c  t .
                                  k
   Sharing Intellectual Property
 Direct  sale is better for the producer if
                      c
                   c   t.
                      k
                k
 I.e. if c       t.
              k 1
   Sharing Intellectual Property
 Direct sale is better for the producer if
                      k
                c       t.
                    k 1
 Direct sale is better if
  – replication cost c is low
  – rental transaction cost t is high
  – rentals per item, k, is small.

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:1
posted:2/14/2012
language:
pages:62