Cambridge University Press

0521844150 - The Economics of Information Technology: An Introduction

Hal R. Varian, Joseph Farrell and Carl Shapiro
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The Economics of Information Technology

An Introduction

The Economics of Information Technology is a concise and accessible

review of some of the important economic factors affecting infor-
mation technology industries. These industries are characterized by
high fixed costs and low marginal costs of production, large switching
costs for users, and strong network effects. These factors combine to
produce some unique behavior. The book consists of the two parts. In
the first part, Professor Varian outlines the basic economics of these
industries. In the second part, Professors Farrell and Shapiro describe
the role of intellectual property in these industries.
The clarity of the analysis and exposition makes this an ideal intro-
duction for undergraduate and graduate students in economics, busi-
ness strategy, law and related areas.

h a l r . va r i a n is the Class of 1944 Professor at the School of

Information Management and Systems, the Hass School of Business,
and the Department of Economics at the University of California at
Berkeley.

j o s e p h f a r r e l l is Professor of Economics in the Department of

Economics at the University of California at Berkeley. He has served
as Deputy Assistant Attorney General and Chief Economist at the
Anti-Trust Division, US Department of Justice, 2000–2001.

c a r l s h a p i r o is the Transamerica Professor of Business Strategy at

the Haas School of Business at the University of California at Berkeley.
He also is Director of the Institute of Business and Economic Research,
and Professor of Economics in the Economics Department at the
University of California at Berkeley.

© Cambridge University Press www.cambridge.org

Cambridge University Press
0521844150 - The Economics of Information Technology: An Introduction
Hal R. Varian, Joseph Farrell and Carl Shapiro
Frontmatter
More information

T H E R A F FA E L E M AT T I O L I L E C T U R E S E R I E S
............................................................................................

The Economics of Information

Technology

An Introduction
............................................................................................

Hal R. Varian
Joseph Farrell
Carl Shapiro

© Cambridge University Press www.cambridge.org

Cambridge University Press
0521844150 - The Economics of Information Technology: An Introduction
Hal R. Varian, Joseph Farrell and Carl Shapiro
Frontmatter
More information

published by the press syndicate of the university of cambridge

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C Banca Intesa 2004

This book is in copyright. Subject to statutory exception

and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without
the written permission of Cambridge University Press.

First published 2004

Printed in the United Kingdom at the University Press, Cambridge

Typeface Utopia 9.5/13 pt. System LATEX 2ε [tb]

A catalogue record for this book is available from the British Library

Library of Congress Cataloguing in Publication data

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press. However, the publisher has no responsibility for the websites and can
make no guarantee that a site will remain live or that the content is or will
remain appropriate.

© Cambridge University Press www.cambridge.org

Cambridge University Press
0521844150 - The Economics of Information Technology: An Introduction
Hal R. Varian, Joseph Farrell and Carl Shapiro
Frontmatter
More information

Contents

List of figures page vii

The Raffaele Mattioli Lectures ix

Part I Competition and market power 1

1 Introduction 1
2 Technology and market structure 3
3 Intellectual property 4
4 The Internet boom 5
5 Differentiation of products and prices 12
6 Switching costs and lock-in 21
7 Supply-side economies of scale 25
8 Demand-side economies of scale 33
9 Standards 37
10 Systems effects 42
11 Computer mediated transactions 45
12 Summary 46

Part II Intellectual property, competition, and

information technology 49
13 Introduction 49
14 Patents, trade secrets, and copyrights 54
15 Differentiation of products and prices 73
16 Switching costs and lock-in 77

© Cambridge University Press www.cambridge.org

Cambridge University Press
0521844150 - The Economics of Information Technology: An Introduction
Hal R. Varian, Joseph Farrell and Carl Shapiro
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vi Contents

17 Standards and patents 80

18 Do we need to reform the patent system? 82
19 Summary and conclusions 85

Bibliography 87
Index of names 97
Index of subjects 99

© Cambridge University Press www.cambridge.org

Cambridge University Press
0521844150 - The Economics of Information Technology: An Introduction
Hal R. Varian, Joseph Farrell and Carl Shapiro
Frontmatter
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Figures

1 Return on the NASDAQ and S&P 500 during

the 1990s. page 2
2 Competition for an (a) ordinary and (b) perfectly
price discriminating monopolist 29
3 Demand and supply for a network good 35
4 Price and shipments of fax machines 36

vii

© Cambridge University Press www.cambridge.org

Cambridge University Press
0521844150 - The Economics of Information Technology: An Introduction
Hal R. Varian, Joseph Farrell and Carl Shapiro
Frontmatter
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The Raffaele Mattioli Lectures

The Raffaele Mattioli Lectures, in which many prominent

economists have taken part, were established in 1976 by Banca
Commerciale Italiana in association with Università Commerciale
Luigi Bocconi as a memorial to the cultural legacy left by Raffaele
Mattioli, for many years chairman of the bank.
Banca Commerciale Italiana then merged into Banca Intesa,
which is pleased to continue promoting the new series of lectures
together with Università Commerciale L. Bocconi. The aim is to
create an opportunity for reflection and debate on topics of par-
ticular current interest, thus providing stimuli and ideas for the
increasing challenges of a continually changing worldwide eco-
nomic scenario.
The present initiative is therefore dedicated to the analysis of
the effects of important changes which are now taking place in
the world economy: the globalization of markets, the continuous
evolution in the field of information, technology and commu-
nications and the convergence of economics and international
relations.
It is evident that these changes, coupled with the European
Monetary Union, provide many complex subjects that will be best
dealt with from an interdisciplinary perspective.

ix

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Cambridge University Press
0521844150 - The Economics of Information Technology: An Introduction
Hal R. Varian, Joseph Farrell and Carl Shapiro
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x The Raffaele Mattioli Lectures

Distinguished academics and researchers of all nationalities

concerned with all kinds of economic problems will be invited
to take part in this enterprise, with the intention of contribut-
ing to the debate interconnecting economic theory with practical
policy.

© Cambridge University Press www.cambridge.org