Information Economics II

McCombs School of Business

 Rights Management

 Production & Distribution Costs

– IT Production = Reproduction (perfect copy)
– Digital distribution (free samples)
 Complimentary & Complementary Products
– McAfee, Wall Street Journal
 Licenses
– Site license; use license

McCombs School of Business

 Lock-In

 Switching Costs
 Look Ahead and Reason Back
 Total switching cost = customer cost +
supplier cost
 Small costs can create lock-in
 Customer switching cost = potential extra
profit

McCombs School of Business

 Lock-In Cycle

 Brand selection
 Sampling
 Entrenchment
 Lock-in

McCombs School of Business

 Managing Lock-In

 Buyer’s strategy is mirror of seller’s

 Buyers bargain before lock-in
 Buyer’s beware of quasi-rents
 Loyalty programs

McCombs School of Business

 Positive Feedback

 Force behind network externalities.

 May lead to a market “tipping.”
 Evolution (migration path) of market
 Revolution (compelling performance) in
Market

McCombs School of Business

 Strategy in Network Markets

 Standards are key.

 Compatibility creates customer benefits
 Alliances are key for both producers and
users
 Open vs. Closed standards.

McCombs School of Business

 Generic Strategies in Network
Markets
STANDARDS

Proprietary Open

Compatibile Controlled Migration Open Migration

TECHNOLOGY

Incompatible
Firm Discontinuity Market Discontinuity

McCombs School of Business

 Generic Strategy Examples

 Controlled Migration: Microsoft, Intel

 Firm Discontinuity: Iomega, Nitendo
 Open Migration: modems, FAX, LINUX
 Market Discontinuity: Cassette Tape, CDs,
31/2” disk

McCombs School of Business

 Types of Standards Wars

Rival Technology

Compatible Incompatible

Compatibile Rival Evolutions Evolution vs Revolution

Your Technology

Incompatible
Revolution vs Evolution Rival Revolutions

McCombs School of Business