Information Rules:
A Strategic Guide to the Network Economy
By
Carl Shapiro and Hal R. Varian
Reviewed By:
Amit Sharma
INF385Q – Fall 2005
University of Texas at Austin
Topics
•
•
•
•
•
•
About Authors
Definitions in Economy
Theme of the Book
Information Policy
Example – Battle of Browsers
Critique
About Authors
“The books that help you the most are the ones that make you think the most”
- Theodore Parker
 Carl Shapiro :
He is the Transamerica Professor of Business Strategy at the
Haas School of Business at UC - Berkeley . He also is The
Director of the Institute of Business and Economic Research,
and Professor of Economics in the Economics Department,
at UC Berkeley.
 Hal R. Varian:
He is the Dean of the School of Information Management
and Systems at UC Berkeley. He is also a professor in the Haas
School of Business, a Professor in the Economics Department.
The Information Economy
Economy:
All the activities involved in the production and distribution
of goods and services.
Information Economy:
It is an economy based on the exchange of knowledge
information and services rather than physical goods
and services.
The Information Economy (2)
Information:
Any Essentially, anything that can be digitized—encoded as a
stream of bits—is information. E.g. baseball scores, books, databases,
magazines, movies, music and Web pages are all information goods.
The book focuses on the value of information to different consumers.
Cost of Producing Information:
“ Information is costly to produce but cheap to reproduce.”
Theme of the Book:
3 Strategies for Information Economy:
1)
Differentiation of Product and Services.
2)
Lock – In.
3)
Positive feedback.
Differentiation of Products
and Services
Strategies used:
a) Mass Customization
b) Differential Pricing
e.g.
c) Personalized Content
d) Versioning
How to design your "product
line"?
1) Offer Versions
Dimensions: Delay, User Interfaces ,Image Resolution, Speed of Operation,
Format, Capability, Features, comprehensiveness, support
2) Principle of “self-selection” :
Design these versions to accentuate the needs of different groups of customers.
Lock In Cycle
Phase 4
Lock-In
Phase 1
Brand Selection
Phase 3
Entrenchment
Phase 2
Sampling
Lock In
How do Buyers Recognize that they are in Lock In?
• Contractual Commitments
• Durable purchases
• Brand specific Training
• Information and Databases e.g. CD and DVD
• Specialized suppliers.
• Search costs. e.g. Travel Agent, Insurance Agent etc.
• Loyalty Programs
Managing Lock- In for Buyers
How to avoid Lock-In?
• Bargain for initial sweeteners, such as discounts or support
for switching from your previous system.
• Don't be too anxious.
• Depict yourself as an attractive customer down the road
• Seek protection from monopolistic exploitation
• Keep your options open via second sourcing
• Watch out for creeping lock-in, and retain information
about usage records.
Managing Lock-In for Sellers
• 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.
Positive Feedback
“ Positive feedback makes the strong grow
stronger . . . and the weak grow weaker.”
Positive Feedback (cont.)
How it Helps?
1) Adoption dynamics in the presence of positive feedback tend to
follow a predictable pattern. e.g. NES
2) Consumers value information technologies that are widely used,
just as they value communications networks with broad reach.
3) Positive feedback works to the advantage of large networks and
against small networks.
Positive Feedback (cont.)
• Generic strategies for innovators in
network markets:
Control
Compatibility
Performance
Openness
Controlled Migration
Open Migration
e.g. Win 98 and Intel PII
e.g. Modems
Performance Play
e.g. Nintendo Entertainment System
Discontinuity
e.g. CD Audio and Floppy Drive
Information Policy
• Don't expect the government's role to diminish.
• Every company needs to know the rules of
competition.
• Companies have considerable freedom to engage
in differential pricing.
• Competition policy is intended to ensure a fair
fight, not to punish winners or protect losers.
Information Policy
• Don't be afraid of cooperating with other
companies to set standards and develop new
technologies, so long as your efforts are designed
to bring benefits to consumers.
• If you are fortunate enough to gain a leading share
of the market, be sure to conduct an audit of your
practices.
Battle of the Browsers
Netscape
Microsoft
Preemption
•
Head start with Navigator in 1995, most
companies had already installed their
software
•
Microsoft came with IE in 1998 and
marketed through OEM, ISP etc.
•
Made IE free online and making it Default
Browser.
•
Investing heavily on User Interface
Penetration Pricing
•
Made browser available free of charge,
pioneered the idea of Plug-Ins ( third
party software )
•
Earns revenue through its other products
e.g. Netscape Web site
Battle of the Browsers (cont.)
Netscape
Microsoft
Expectation mgmt:
•
Netscape has partnered with
100 industrial companies in
order to bundle their product
•
Integrating IE in Windows OS
and making user believe that
they do not have a need to
install a new browser.
•
Microsoft as stated earlier has
already developed alliances
with OEM,ISP and Content
Providers by providing Financial
Schemes
Alliances:
•
Netscape and Sun
Microsystems are strong allies,
with Netscape supporting Sun's
Java and Sun helping lend
credibility to Netscape
Critique
• The definition of Information on which the book focuses is very
broad according to author.
• Authors fail to mention about the importance of Sales and Marketing
in an economy .
• Third party role in Information Economy is not taken into
consideration.
• An economy is not complete until its unit of transactions are defined.
The author fail to define how to estimate the value of a product
which is available in bits form.
THANK YOU