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Economics of Information Technology

Economics of Information Technology

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Published by: Aaron Merrill on Dec 04, 2009
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Economics of Information Technology
Hal R. Varian
University of California, BerkeleyJuly 2001Revised: March 23, 2003
Abstract
This is an overview of economic phenomena that are importantfor high-technology industries. Topics covered include personalizationof products and prices, versioning, bundling, switching costs, lock-in,economies of scale, network effects, standards, and systems effects.Most of these phenomena are present in conventional industries,but they are particular important for technology-intensive industries.I provide a survey and review of recent literature and examine someimplications of these phenomena for corporate strategy and publicpolicy.
This is a revised version of the Raffaele Mattioli Lecture, delivered at Bocconi Uni-versity, Milano, Italy, on November 15-16, 2001 and the Sorbonne on March 6, 2003. Itis based, in part, on the paper I delivered at the Federal Reserve Bank of Kansas CityJackson Hole Symposium, August 2001. Research support from NSF grant SES-9979852and is gratefully acknowledged, as are helpful comments by Erik Brynjolfsson, Joe Farrell,Paul Klemperer, and Kevin Murphy. Email for comments:
hal@sims.berkeley.edu
.
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CONTENTS 
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Contents
1 Introduction 42 Technology and market structure 53 Intellectual property 64 The Internet boom 7
4.1 Financial speculation . . . . . . . . . . . . . . . . . . . . . . . 104.2 Where are we now? . . . . . . . . . . . . . . . . . . . . . . . . 114.3 The New Economy. . . . . . . . . . . . . . . . . . . . . . . 13
5 Dierentiation of products and prices 13
5.1 First-degree price discrimination . . . . . . . . . . . . . . . . . 135.2 Second-degree price discrimination . . . . . . . . . . . . . . . 165.3 Third-degree price discrimination . . . . . . . . . . . . . . . . 175.4 Conditioning on purchase history . . . . . . . . . . . . . . . . 185.5 Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185.6 Bundling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6 Switching costs and lock-in 20
6.1 Simple analytics of lock-in . . . . . . . . . . . . . . . . . . . . 216.2 Competition to acquire customers . . . . . . . . . . . . . . . . 216.3 Analytics of competition to acquire customers . . . . . . . . . 236.4 Switching costs and price discrimination . . . . . . . . . . . . 23
7 Supply-side economies of scale 24
7.1 Competition and welfare . . . . . . . . . . . . . . . . . . . . . 267.2 Competing for monopoly . . . . . . . . . . . . . . . . . . . . . 287.2.1 The currency of competition . . . . . . . . . . . . . . . 287.2.2 Rules of the game . . . . . . . . . . . . . . . . . . . . . 29
8 Demand-side economies of scale 319 Standards 35
9.1 Standards wars . . . . . . . . . . . . . . . . . . . . . . . . . . 369.2 Standards negotiations . . . . . . . . . . . . . . . . . . . . . . 379.3 Standards leader . . . . . . . . . . . . . . . . . . . . . . . . . 38
 
CONTENTS 
39.4 Cost advantages of standardization . . . . . . . . . . . . . . . 38
10 Systems eects 3911 Computer mediated transactions 4112 Summary 43

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