Unit 2: Markets for Information Goods

Markets for Information Goods

Technology changes but Economic laws do not. If you are struggling to comprehend what the Internet means for you and your business, you can learn a great deal from the advent of the telephone system a hundred years ago. But many of today’s managers are so focused on the trees of technological change that they fail to see the forest: the underlying economic forces that determine success and failure.

Netscape, the one-time darling of the stock market, offers a good example of how economic principles can serve as an early warning system. In our framework, Netscape is facing a classic problem of interconnection: Netscape’s browser needs to work in conjunction with Microsoft’s operating system. Local telephone companies battling the Bell System around 1900 faced a similar dependency upon their chief rival when they tried to interconnect with Bell to offer long-distance service. Many did not survive. Interconnection battles have arisen regularly over the past century in the telephone, the railroad, the airline, and the computer industries, among others. We examine numerous business strategies on both the information (software) and the infrastructure (hardware) sides of the industry. Software and hardware are inexorably linked. Indeed, they are a leading example of complements. Neither software nor hardware is of much value without the other; they are only valuable because they work together as a system.

Foundation of information economy

Information economy or economics of information is a branch of microeconomic theory that studies how information affects an economy or economic decisions.

• It applies to any ideas, expression of an idea or facts that is known by one person and is potentially of value to another.
• The special characteristics of information as compared to other type of goods complicate many standard economic theories.
• It is also described as an economy where information is both the currency and the product.
• While we have always relied on information exchange to do our jobs and run our lives, the information economy is different in that it can collect more relevant information at the appropriate time.
• Consequently, production in the information economy can be fine- tuned in ways heretofore undreamed of. What makes information plentiful in this economy is the pervasive use of information and communications technology.
• Three foundation of information economy:

–  communication

–  technology

–  information

Introduction to information economy

• Information economics is the discipline  of modeling the role of information in an economic system.
• Information is a strange good that is easy to create, difficult  to validate, easy to share but difficult to unshared.
• Information is a fundamental economic force that plays a role in every economic Many economic models make native assumptions about information such as the assumption that all economic agents have perfect information. As such, where economic models fail it is common for information economics to be used to explain the gaps.
• Information economics or the economics of information is a branch of microeconomic theory that studies how information and information systems affect an economy and economic decisions.

Information has special characteristics:

1. It is easy to create but hard to trust.
2. It is easy to spread but hard to control.
3. It influences many decisions.
4. These special characteristics (as compared with other types of goods) complicate many standard economic theories.
5. The information economy is global.
6. The information economy is that it is highly productive.
7. The information economy is the change in the manner of obtaining profits.

Definition of information goods

• An information good is a good whose value comes from the information it contains. Information good in economics and law is a type commodity whose market value is derived from information it contains.
• Examples include CDs containing pieces of music, DVDs containing movie content, and books containing short Information goods are in contrast to material goods such as clothes, food, and cars. These can exist in either digitized form or analog format.
• There is no sharp line dividing information goods from other goods. A computer file is clearly information good, but conventional goods also contain information; for example, the value of a piece of furniture is partly the result of the knowledge of the furniture-maker, embodied in its form.
• But although almost all recordings sold these days are in digital form and can be sent over the Internet, many people still prefer a physical CD to a downloadable By any definition, however, the importance of information goods in the economy has clearly been increasing.

The cost of producing information

• Digital or information goods are becoming the norm across a wide variety of industries including books, music, entertainment, gaming and education.
• Due to the fact that the marginal cost of producing or reproducing information goods is very low, it is much easier to customize and personalize them for individual users.
• Information is costly to produce but cheap to reproduce.
• High fixed costs but low marginal costs:–The cost of producing the first copy may be substantial, but that of producing additional copies is negligible.
• Price information according to its value, not its cost.
• Furthermore, sellers of these information goods are increasingly using bundling and versioning strategies to appropriate a greater share of the surplus.

Managing intellectual property

• Intellectual property (IP) is a term for any intangible asset — something proprietary that doesn’t exist as a physical object but has value.
• Examples of intellectual property include designs, concepts, software, inventions, trade secrets, formulas and brand names, as well as works of art.
• Securing and enforcing patents, trademarks, copyrights, and trade secrets builds value in your business and helps you stay ahead of the competition.
• To remain competitive, your business cannot afford to leave its intellectual assets unprotected or to forego enforcing its intellectual property rights.
• When managing intellectual property, your goal should be to choose the terms and conditions that maximize the value of your intellectual property, not the terms and conditions that maximize the protection.

Economic and public goods

• An economic good will have some degree of scarcity in relation to demand. It is the scarcity that creates a value people become willing to pay for. It is the scarcity which creates opportunity cost.
• For example, if we pick apples from a tree, it means that other people will not be able to enjoy them.
• An economic good is a good or service that has a benefit (utility) to society. Also economic goods have a degree of scarcity and therefore an opportunity cost.
• A pure public good is both nonrival and nonexcludable. Nonrival means that one person’s consumption doesn’t diminish the amount available to other people, while nonexcludable means that one person cannot exclude another person from consuming the good in question.
• Classic examples of pure public goods are goods like national defense, lighthouses, TV broadcasts, and so on. The two properties of a public good are quite different.
• Nonrivalness is a property of the good itself: the same amount of defense, lighthouse services and TV broadcasts are available to everyone in the region served by the very nature of the good.
• Excludability is a bit different since it depends, at least in part, on the legal For example, TV broadcasts in England are supported by a tax on TVs; those who don’t pay the tax are legally (but not technologically) excluded from watching the broadcasts. Similarly, in the US cable TV broadcasts may be encrypted and special devices are required to decode them.

Economics of attention

• The basic ideas behind the Attention Economy are Such an economy facilitates a marketplace where consumers agree to receive services in exchange for their attention.
• The ultimate purpose is of course to sell something to the consumer, but the selling does not need to be direct and does not need to be instant.
• For example news feeds illustrate the point well, since they ask for consumers attention in exchange for the opportunity to show him/her advertising.
• The Search engines are similar in that respect, because they show ads in exchange for helping users find answers online.
• By gathering better information about what particular customers want, the information provider can design products that are more highly customized and hence more valuable.

Technology

• So far we discussed about the information side, but the Technology side deals with the infrastructure that makes it possible to store, search, retrieve, copy, filter, manipulate, view, transmit and receive information.
• The technology is the packaging that allows the information, to be delivered to end A single copy of a film would be of little value without a distribution technology. Likewise, computer software is of value because computer hardware and network technology are now so powerful and inexpensive.
• The value of the Web lies in its capacity to provide immediate access to information. Using the Web information, suppliers can distribute up to date information dynamically from databases and other repositories.
• Improved information infrastructure has vastly increased our ability to store, retrieve, sort, filter and distribute information, there by greatly enhancing the value of the information itself.

System competition

• Systems show up everywhere in information technology like operating systems, CPUs, chips, disk drives, video cassettes recorders and videotapes. Hence, one firm cannot offer all the pieces that make up an information system.
• Traditional rule of competitive strategy though focus on competition but in information economy, companies selling complementary goods cannot compete with the rest of the system.
• Many of our strategic principles are specifically designed to help companies selling one component of an information system.
• The dependence of information technology systems means that firms must focus not only on their competitors but also on their Forming alliances, cultivating partners, and ensuring compatibility (or lack of compatibility) are critical business decisions.
• Eg, Microsoft-Intel partnership. Microsoft focused exclusively on software while Intel focused exclusively on hardware. Further they both focused on their core strengths, eg, Intel focused on video cards, sound cards, and hard drives as well as assembly and distribution of personal computers.
• But Apple perusing the different strategy by producing a highly integrated product consisting of both hardware platform and the software ran on it was expensive and made them weak in market.
• From the newest consumer gadgets to the explosion in communications capability that is driving global economic growth; technological innovation enhances our lives and provides us with new tools to perform everyday tasks.

Lock in and switching costs

Lock in:

• A strategy in which the customer is so dependent on a vendor for products and services that the customer cannot move to another vendor without substantial switching costs, real and/or perceived.

Switching costs:

• The costs incurred when a customer changes from one supplier or marketplace to another.
• The higher these costs are, the more difficult it is to execute the switch.
• A great product isn’t enough to bring a flock of customers to your You must design a superior business model to attract and retain customers into your ecosystem. Switching costs have enabled industry leaders such as Adobe, Sales force, Microsoft or Rolls Royce to lock customers in and outcompete other players .

Positive feedback, network externalities, standards

Positive feedback

• Technological evolution has impacted our lives positively over the last two decades, so we should expect the same or similar outcomes from the future.
• Technological advancements have had effects in all areas Health, Advertisement, Finance, Entertainment, and Transportation, just anything you can think about. So the best shot at the future won’t be far-fetched as far as technology is concerned.
• One thing technology as done which is the most important thing is giving us the fastest way to perform day 2 day activities very efficiently, imagine more of that in the The future of technology is bright to those who are optimistic and less paranoid about it.
• Positive feedback makes large networks get larger

Network externalities

• Network externalities are the effects a product or service has on a user while others are using the same or compatible products or services.
• Positive network externalities exist if the benefits (or, more technically, marginal utility) are an increasing function of the number of other users.
• Negative network externalities exist if the benefits are a decreasing function of the number of other users.
• For example, Facebook likely confers positive network externalities since it is more useful to a user if more people are using it as well. Conversely, a road can confer negative network externalities since a driver on the road creates traffic for other drivers of the road.
• The network effect is a phenomenon whereby an increasing number of people or participants who are exposed to a company, good, or service can increase the value of the company, good, or service.
• E-commerce sites, such as Etsy and eBay, grew in popularity by accessing online networks and attracting consumers to their services and products.
• Some companies cannot achieve critical mass—the number of users needed for the network effect to take hold—even with access to online and offline networks
• Congestion is a negative network effect whereby too many users can cause the network to slow down reducing its utility and frustrating network members.

Standards:

• This describes the international IT management models and standards applied in the development of the IT
• Standards change competition for a market to competition within a market.
• Some the IT standards are:
• ITIL- Information Technology Information Library
• CMMI – Capability Maturity Model Integration
• COBIT – Control Objectives of Information Technology
• PMBOK – Project Management Body of Knowledge
• PRINCE2 – Project In Controlled Environment
• ISO/IEC 20000 –International Standard for Organization/ International Electro Technical Commission
• ISO 21500
• ISO/IEC 38500
• TOGAF – Technical Open Group Architecture Framework

ITIL

• ITIL, formerly known as Information Technology Infrastructure Library, is a set of guidelines and best practices for IT service management (ITSM). ITIL focuses on aligning IT services to the needs of business and supports its core It is structured and published in five core volumes: Service Strategy, Service Design, Service Transition, Service Operation and Continual Service Improvement.

CMMI

• CMMI®, Capability Maturity Model® Integration, is an internationally known reference model developed through best practices that provide guidance for improving processes that meet the business goals of an organization. It was developed by industry experts, governments, and the Software Engineering Institute (SEI).
• CMMI improves processes for an organization to show measurable benefits for their business objectives and An organization can organize and prioritize its methodologies, people, and business activities through the framework provided by CMMI. The framework supports coordination of multi- disciplinary activities and systematic thinking.

COBIT

• COBIT 5 (launched in 2012), The Control Objectives for Information and Related Technology, is owned and supported by It was originally released in 1996 as COBIT. The current version 5.0 consists of COBIT 4.1, VAL IT 2.0, and Risk IT frameworks.
• COBIT 5 helps to create optimal value using IT by maintaining a balance among benefit realization, risk optimization, and resource The framework covers both business and IT units in the whole organization.
• It provides metrics and maturity models to measure whether or not the IT organization has achieved its objectives. In addition, it also balances the needs of internal and external stakeholders.

PMBOK

• PMBOK, a Guide to the Project Management Body of Knowledge, is a guide to the internationally recognized project management methods by the Project Management Institute (PMI).
• PMBOK is a standard that is widely accepted and acknowledged as basis for most project management methods.
• PMBOK provides an in-depth description of the required content and fundamentals of a project, but does not focus on giving hands- on implementation advice. Practical guidance is offered by other models such as It is based on five basic processes: Initiating, Planning, Executing, Controlling and Monitoring, and Closing.

PRINCE2

• PRINCE2, Projects IN a Controlled Environment, is a de facto standard project management method owned by the UK Cabinet Office.
• PRINCE2 complements the PMBOK model by providing a process-based and practical guidance with ready-to-use templates for Project Managers and Project Steering Groups in the different phases of a project. PRINCE2 ensures greater control of resources and effective management of business and project risks.
• For example, the seven principles of PRINCE2 state how a project should be run throughout its life-cycle: a project must have a business justification, clearly defined roles and responsibilities in all phases and processes, managed by stages to provide detailed and timely planning, defined tolerances for management by exception, product focused delivery where project methods are tailored to fit this particular project’s needs, and learning from experience to continuously improve organization’s project culture.

ISO/IEC 20000

• ISO/IEC 20000 is a service management system (SMS) and the first international standard for IT service It is owned by The International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC). It is broadly aligned with ITIL.
• The ISO/IEC 20000 has two parts. The first part defines the formal requirements for high-quality production of IT services to the IT includes criteria for planning, service management, and service production as well as for customer / supplier management.
• The second part describes the processes of service production largely in the same way as the ITIL processes while focusing, however, more closely on customer/supplier management processes.

ISO 21500

• ISO 21500 is a standard that provides ―generic guidance on the concepts and projects of project management which are important in the realization of successful projects.
• It can be used by any type of organization and applied to any type of project – irrespective of size, complexity or duration.
• ISO 21500 is an informative standard, that is rather a general guideline than a certified methodology. It provides high-level description of concepts and processes that are considered to form good practice in project management and places projects in the context of programs and project portfolios. PMBOK is very much in line with ISO 21500 and vice versa.

ISO/IEC 38500

• ISO/IEC 38500 is a standard providing general principles on the role and IT governance of management with business responsibility (for example, Board of Directors and Management Team). It can be widely applied to all kinds and sizes of organizations for example public and private companies and non-profit organizations.
• The standard supports business management in their supervision of the IT organization and helps them ensure that IT has a positive impact on the company’s performance. The standard consists of six principles:

1. 1. Responsibility
   2. Strategy
   3. Acquisition
   4. Performance
   5. Conformance
   6. Human behavior

• Adherence to the ISO/IEC 38500 standard can assure management of conformance with good governance

TOGAF

• TOGAF is an Open Group Standard enterprise architecture framework that allows organizations to have a structured approach for governing the implementation of technology, in particular the software technology design, development, and maintenance.
• It was first published in 1995 and was based on the US Department of Defence Technical Architecture Framework for Information Management (TAFIM). It has been since developed by The Open Group Architecture Forum and released in regular intervals on the Open Group public website.
• TOGAF improves business efficiency by ensuring consistent methods, communication, and efficient usage of It ensures industry credibility with a common language among enterprise architecture professionals.

Policy

• Information economics and policy concerns the production, distribution and use of information and associated policies.
• Laws imposed by government to promote fair market competition.
• Generally policies restricts merger and acquisitions that hamper or restrict competition in the market.
• Competition among sellers gives consumers lower prices, higher-quality products and services, more choice, and greater innovation.
• Areas of research include;
  • e-commerce,
  • the ―bundling‖   and   ―valuation‖  of information goods and services,
  • how information and information technology systems affect an economy and economic decisions,
  • personal and organizational privacy, and the ―right to be forgotten‖.
• Aspects of information economics are related to game theory concepts such as on-line auctions, dynamic automated resource allocation, intelligent agents, and other concepts.