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BOOK REVIEW

INFORMATION RULES
A Strategic Guide To The Network Economy
Carl Shapiro
Hal R Varian
Group -9
Business Strategies opted by companies in Information
technology business & Network economy.

This book covers
Information economy
Pricing Policy in Information economy
Patent & Copyright managements
Identification & managing of locking-in of customers &
suppliers
Positive Feedback & creating installed customer base
Concept of standard-rich environment
Rules & Policies of Federals Antitrust Law
The
Information
Economy
1
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 (Hollywood rental example)
Information as an Experience Good (Eg: Newspaper for 2 Rupee)
The economics of information (pricing, timing)
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)
Pricing
Information
2
Information is costly to produce but cheap to reproduce
MARKET
STRUCTURE
DOMINANT FIRM
MODEL
DIFFERENTIATED
PRODUCT
MARKET
COMPETETIVE
STRATEGY
DIFFERENTIATE
PRODUCT
ACHIEVE COST
LEADERSHIP
These classic
descriptions are as
valid as they ever
were
Personalized pricing
Versioning
Group Pricing
Pricing Information
Technology changes. Economic Laws Do Not
Versioning
Information
3
Information is like an oyster: it has its greatest value when fresh
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-Selection Let 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
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 it
decreases the variation across customers in their willingness to pay.

Nonlinear pricing : Let consumer builds their own bundles. Quantity
discounts can increase usage and revenue from 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.

Rights
Management
4
12
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 product More Revenues
- Higher copying & sharing Less sales

Trick is to pick the terms and conditions to maximize the value of
your intellectual property, not to maximize the protection.
Documents, music &
video
Digital Technology Poses Two Challenges
Opportunities to advertise products to
increase sales
Opportunities to make illegal
copies
Recognizing
Lock-In
5
14
Switching Costs:
Can be huge or small
Cannot compete effectively unless you know how to identify, measure,
and understand switching costs and map strategy accordingly

As a customer, failure to understand switching costs will leave you
vulnerable to opportunistic behaviour by your suppliers

As a supplier, switching costs are the key to valuing your installed base

Fortunately, lock-in arises in one industry after another according to
certain identifiable patterns

The essence of lock-in is that your choices in the future will be limited by
your investments today. These linkages differ from one technology to
another, but are predictable
Managing
Lock-In
6
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.
Networks And
Positive
Feedback
7
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
Cooperation
And
Compatibility
8
Competition in network markets.
Standards altering competition
Opportunity to build alliance
Support to spread the word of your new technology
Managing open standards
Waging A
Standards
War
9
Self / Rival Compatible Incompatible
Compatible
Rival Evolution
(DVD & DivX for running
CDs)
Evolution vs. Revolution
(Spreadsheet-LOTUS 1 2 3 vs.
Excel)
Incompatible Revolution vs. Evolution
Rival Revolution
(AC & DC in electrical system)
War Tactics:
Preemption
Early leads for positive
feedback
&
Aggressive (Penetrative)
Pricing Mechanism
Expectations management
Vaporware
&
strong sentiments on Product through
Allies
Assets in Wars:
Intellectual Property rights, Manufacturing abilities
Innovation abilities, Developing
complementary product Reputation & Brand name Installed
Customer Base
,
Words of caution: Post winning war
Rear guarding If falling behind, target market niche
Avoid Survival Pricing Survival Pricing backfires & it shows weakness
in position
Information
Policy
10
Rules & Laws: Against
Merger & Acquisition
Cooperation among rivals &
Lock-in of 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 Policy 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
Conclusion
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 social
welfare not the profitability of firms

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

Thank You!!