INFORMATION,
MARKETS AND SOCIETY
Kathy E. Gill
06 October 2009
OVERVIEW
What is an Info Economy?
 Economics 101

Types of goods
 Network effects


Examples and Discussion
WHAT IS AN INFO ECONOMY?

“An economy based on the exchange of knowledge
information and services rather than physical
goods and services.”
Australian Gov’t, Dept. Finance and Administration, 2001.
HISTORY OF TERM, CONCEPT
 1963:
Tadeo Umesao, Kyoto University,
forecast an information industry
 1973: Daniel Bell, Harvard, described a
knowledge-based post-industrial economy
 1981: Frederick Williams, UT Austin, said
the communication revolution had arrived
and expounded on the “knowledge worker”
The Information Society, A Retrospective View. Dordick and Wang. 1993.
BELL
 Post-industrial
society will be “organized
around knowledge for the purpose of
social control and the directing of
innovation and change”
 The transformation is industrial to service
 Anticipated tension between high-tech,
intellectual work and nonprofessionals
TODAY (ALMOST!)
 1997:
Bill Gates traced the computer from
mainframe to personal to network. “[W]e
have the most powerful communications
medium of all time… And the information
age is changing business in a fundamental
way… [as well as] the way we entertain …
and … [educate] ourselves.”
Information Technology, Corporate Productivity and the New Economy, p 4
NO STANDARD NOMENCLATURE
Info Economy, Post-Industrial Economy, “New”
Economy?
 One definition: the new economy is an integration of
free-market economies, globalization and information
technology

Information Technology, Corporate Productivity and the New Economy, p 9
WHAT IS INFORMATION?

In the context of this class, anything that can be
converted to bits, ie, digitized, is an information
good
Entertainment
 News
 Business Info
 Software

WHAT IS INFORMATION TECHNOLOGY?
 Telecommunications,





computers, software
Communication: E-mail, IM, TheWeb
Networks: Extranet, Intranet, Internet, LAN, WAN
Software: Expert systems, Enterprise Resource
Planning, Query and Reporting, Data Mining
Networks: T1, T3, Wireless, WiMax
Protocols: HTTP, FTP, VoIP, SMS
SOCIETAL FACTORS

Demand for IT:


Productivity?
Effect of Growth:


Collapse of space and time
Reduction of scarcity
COMPETING THEORIES
 Technology

A new society without pollution; time for
creative work; participatory democracy;
perfect markets…
 Technology

optimists
pessimists
No new society but an increase the divide
between rich and poor; greater control over
individuals; erosion of privacy…
 Technology
+ economics + society
SUMMARY

Use whatever label you wish … the makeup of
our economy has changed. Information as a good
and information technologies have replaced goods
made of atoms and technologies relying upon
muscle.
ECONOMICS 101
Supply & Demand
 Market Structure
 Types of Goods
 Network Effects
 Examples/Discussion

WHAT IS ECONOMICS?
 Economics
is the study of how people (and
institutions) act in a society with limited
resources (iow, scarcity)
The choices are more diverse than simply $$
- it’s also time, work, savings
 Driving principle: that people optimize the
“utility” (satisfaction) of goods and services
consumed - that we are rational

JOHN KENNETH GALBRAITH

“Faced with the choice between changing one’s
mind or proving that there is no need to do so,
almost everybody gets busy on the proof.”
KUHNEN & KNUTSON (2005)
Found that two brain areas known to be part of
emotional processing (the limbic system) can help
predict financial choices
 IOW, the rationality theorem has been shown to
be fallacious

SUPPLY AND DEMAND
Most widely used economic model
 Describes how consumers and producers interact
to determine the price of a good and the quantity
that will be produced/sold

DEMAND CURVE
Shows the quantity of a good (or service) that
consumers are willing to buy at different prices
 Assumes “all other things” remain constant
(static)
 Law of Demand: curve slopes “downward” (P on
the vertical axis)

SUPPLY CURVE
Shows the quantity of a good (or service) that
businesses are willing to sell at each price
 Assumes “all other things” remain constant
(static)
 No “law of supply”

SUPPLY-DEMAND
COMPETITIVE MARKETS (PERFECT
COMPETITION)
No buyer or seller can influence price
 Products and services are identical
 No barriers to entry/exit
 Everyone (consumer, worker, producer) has
access to perfect information on prices and costs
 Examples (maybe): wheat, corn (commodities)

MARKET STRUCTURE

Classic Free (Competitive) Market
Low fixed costs
 Marginal cost = price … marginal cost is the cost
of producing one additional unit


The “Natural” Monopoly
Large fixed costs
 Small/zero marginal costs
 Examples: utilities

ECONOMICS OF INFORMATION
Costly to produce
 Inexpensive to re-produce
 Economist-speak:


High fixed costs, low marginal costs
ECONOMICS OF ATTENTION

Info overload: “a wealth of information
creates a poverty of attention” (Herbert
Simon)
TYPES OF GOODS (1/2)
 Non-rival
- a good that can be used by
more than one person at the same time
(an idea)
 Non-excludable - it is not possible for the
“owner” to exclude others from consuming
this good (non-patented idea)
TYPES OF GOODS (2/2)
Rival
Non-Rival
Excludable
• Most consumer goods
• Private land
• Services
• Single license software
• Trade secrets
• Multi-license software
• Patents
• Subscription web sites
NonExcludable
• Public land
• Most roads
• Water - rivers, lakes
• “Public Goods”
• Basic research
• Defense, police, firemen
• Lighthouse
• “Open” websites
• TV (not cable!)
EXCLUDABILITY AND INFORMATION

From the World Bank: Assume someone
produces a valuable theorem, but it cannot be kept
secret -- it must be made immediately available.
Because anyone can immediately use it, there is no
way for an individual to profit from creating it.
TYPES OF EXCLUDABILITY (TRADITIONAL)
Trade Secrets (Coca Cola)
 Patents (Amazon One-Click)
 Copyright (A Fairy Use Tale)
 Will people create knowledge if they can’t charge
for it? World Bank says No. Open source
movement says Yes. [See Wikipedia, for example,
or Linux or Apache.]

o
o
o
Assumes many minds greater than a few
Assumes transparency leads to higher quality
Enabled by virtual computer network
DIGITAL EXCLUDABILITY (TRANSITIONAL?)

DRM
iTunes (TV show rentals), Amazon (mp3)
 Difference in video and music


Subscriptions


RealNetworks and Napster, The Economist and the
WSJ, Spotify and Pandora
Lawsuits (RIAA)
NETWORK EFFECTS (1/2)

Static analysis:
One person’s decision to adopt a new piece of
software (or other technology) has no effect on
someone else’s welfare or decision to adopt
 Assumes no network externality
 Example: mobile phone carrier (interoperability)

NETWORK EFFECTS (2/2)

Dynamic analysis:
The value of the software (or technology) depends
upon the decisions of others (interoperability, for
example)
 Assumes there is a network externality
 Example: fax machine and Office software
 What about … iTunes store, Amazon, eBay?

ONE MORE POINT …

Time (fixed) + Info Explosion (overload?) =
Increased competition for “old” media
CONCLUSION
Economy is increasingly reliant on information
technologies and information
 Digital media change the economic landscape
because economy theory is based on scarcity
 Digital goods are more like non-rival, nonexcludable goods than industrial age goods; public
goods are the antithesis of scarce, excludable goods
 Thus information technology is disruptive, both
economically and socially

RESOURCES (1/3)

The Inkjet Printer, from The Economist. (2002)
http://emlab.berkeley.edu/users/bhhall/e124inkjetprinter.html

The Invention of Email, from Pretext Magazine
(1998)
http://emlab.berkeley.edu/users/bhhall/e124emailinvention.pdf

Hal R. Varian , “High Technology Industries and
Market Structure” (2001)
http://www.sims.berkeley.edu/~hal/Papers/structure/structure.html

Science and Engineering Indicators (2002)
National Science Board.
http://www.nsf.gov/sbe/srs/seind02/start.htm
RESOURCES (2/3)


Michael L. Katz and Carl Shapiro. “Systems
Competition and Network Effects,” Journal of
Economic Perspectives, Vol 8 No 2 (1994)
Nicholas Economides. “The Economics of
Networks,” International Journal of
Industrial Organization, October (1996)
http://www.stern.nyu.edu/networks/top.html

S.J. Liebowitz and Stephen E. Margolis.
“Network Externality: An Uncommon
Tragedy,” Journal of Economic Perspectives,
Vol 8 No 2 (1994)
RESOURCES (3/3)

Timothy F. Bresnahan. “The Economics of the
Microsoft Case.”
http://www.stanford.edu/~tbres/Microsoft/The_Economics_of_The_Microsoft_Case.pdf

Stephen Martin. “The Nature of Innovation Market
Failure and the Design of Public Support for
Private Innovation”
http://www.sam.sdu.dk/undervis/92172.E03/martin_scott.pdf

Tore Nilssen and Lars Sørgard. “TV Advertising,
Programming Investments, and Product-Market
Oligopoly”
http://www.nhh.no/sam/res-publ/2000/dp06.pdf