Information Goods

• These are digitized information.

Eg. Encyclopedias, Directories
• Characteristics:
- High fixed costs but very low variable costs of
reproduction.
- The above results in non excludability and
market failure. (u can stop info.)
- Pricing is Value based (since MC is near zero)
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 Network and Network Industries

• New eco. Rest internet communication

• Industries which provide Information goods are called
Network industries.
• A network is a set of connections between nodes.
• Networks could be real or virtual.
• Larger the network size, more viable the production and
usage. Eg. WhatsApp group msg. save time also increase
total demand in no time
• Eg. New eco. Works by connecting people for free and then
selling their data or through advertisement

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 Networks

• Network Externality: The value to each user

being in the network rises at a rate much higher
than the rate of increase in the size of the
network.

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 Old Economy Industries (OEI) Vs
Network Industries
• In old economy industries (OEI), economies of
scale occur on the supply side, whereas in the
Network industries, they occur on the Demand
side.
• In OEIs, demand is downward sloping and this
‘shifts’ when factors change. For network
industries, demand increase as accumulated
demand increases- a positive feedback chain.
• In OEI, scarcity gives rise to value. In Network
industries, abundance gives rise to value.

Managerial Economics, 2e All rights reserved

©Oxford University Press, 2010
 Rise and Fall of Dot-Coms

• Dot-Coms emerged to deal with products and services that

used the Internet.
• Focused on ‘mind share’ (market share) to realize
Network externalities.
Dot coms who failed eg Satyam comp. &other commu.
Who rise – amazon yahoo
Ignored the result of the outcome of the above- a “winner
takes all” situation.

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©Oxford University Press, 2010
 Fundamental Laws and Concepts of
Old Economy
• Profit Maximization
• Economies of scale results in one or few winners.
• Demand estimation and elasticities are important.
• Cost estimation is essential.
• Eg. Jio – zero price can only happen in new eco. – money came from
stock market
• Google gave android & other things for free – Microsoft windows
vanished from phone segment
But they did not ignored 4 fundamentals
Ignoring the above led to the demise of Dot-Coms
 Internet Pricing Models
• Flat-rate Pricing – fixed period, one amount, dosent change, Eg. Used
telecomm providers
• Usage sensitive Pricing – 2 part tariff – high speed & low speed –
price based on time taken to consume it – Price every as u have to
know when to switch which require additional mechanism
• Transaction- based Pricing – the transaction is the basis not user – e
commerce in other country will not charge for transaction as u r
buying profuct from them
• Priority Pricing – tariff is electricity bill – same for some unit of
consumption – than charges are increased as per unit consumed
• Precedence model – acc. To the consumer like who u r
• Smart Market Mechanism Model – dynamic bidding from the entire
system

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 Role of Government
•Public policy to facilitate adoption and adaptation.(adapted by
all stakeholders)

•Policy to actively promote innovation. (innovation is heart of

new eco. Therefore govt. investing start ups)

•Policy to provide education – by looking at education, poverty,

population can also be controlled (new eco. Is knowledge eco.
Therefore edu. Is must.

•Policy to promote digitization. - Old eco. Was mechanism eco.)

from retail to manufacture everything is digitized- cars are
digitized. Policy are introduced to make villages also digital.
• Govt. should be no more lethargic. The
new eco. Do not support this
• Everything is so dynamic that keeping any
fixed for even a short period results in loss

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 Seasonal cycle V/S Business
Cycle
• Seasonal cycle is short term in nature. Business is long
term
• SC is product wise. BC is economy wise (GDP wise)
• Correction of SC occurs through off seasonal discount (At
producers level – demand est. & thn preparation is done
in off season- At customers level – customers in time
season can pay any price but at off season no price they
give so discount r given to sell product). BC
correction occurs through stabilization policies.
• SC are regular BC are irregular i.e. is no time period fixed