Upload
moses-williamson
View
224
Download
0
Tags:
Embed Size (px)
Citation preview
Overview
Second paper due tomorrow Guest Lecture:
Dr. Kirsten Foot, Assistant Professor, [email protected]
Food break Discussion Leaders Technology : an economic overview
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 each price
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”
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: dental, rental cars, tax prep Single license software
Trade secrets Multi-license software Patents Subscription web sites
Non-Excludable
Public land Most roads Water?
Basic research Defense, police, firemen Lighthouse “Open” websites
Supply of innovation
Dependent on State of scientific/technological
knowledge (technological opportunity) Cost, availability of inputs (knowledge
workers, equipment) Ability to capture increased profits
arising from the innovation (appropriability)
Demand for innovation
Dependent on Cost reduction (process innovation) Consumer benefit from new product
(product innovation) Consumer benefit from improvement in
existing product (incremental product innovation)
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
Network effects (1/2)
Dynamic analysis: The value of the software (or
technology) depends upon the decisions of others (interoperability, for example)
Assumes there is a network externality
Locked In! Consumers may be locked into a network
because of “cost of exit” (switching) Contracts (cell phone 12-month policies) Training (learn a new system – ugh) Data conversion (from Word to Word Perfect,
for example) Search cost (finding the new product) Loyalty cost (frequent flyer programs,
“minutes carry-over”)
Tipping
As market share increases for any one product (system, technology), there are increasing returns (externality) from increasing consumer demand, leading to dominance by one system
Examples (2/2)
OS/2 introduced in 1991 OS/2 sales = 400K; Win sales = 18M OS/2 technically superior – 32-bit
processing not provided by Win until late 1995
OS/2 withdrawn from market (failed) due to incompatibility with other software (cause of poor sales?)
Market Structure
Number of firms Ease of entry and exit Ability to differentiate product from
competitor’s Four types
Competitive (perfect) markets
Consumers believe products are undifferentiated (substitutability)
Firms can enter/exit freely (low capital investment)
Buyers and sellers know the prices (access to info)
Low transaction costs Firms are “price-takers” Dial up service
Monopoly One supplier No product substitution Does not lose all sales if it raises price Price setter Natural monopoly: One firm can produce
all output at lower cost than several firms combined
Example: water utility, cable utility, MSWindows (according to US Gov’t)
Oligopoly A few relatively large firms High barriers to entry Products are good (not perfect)
substitutes Each firm can set its price Market failure: sub-optimal consumption Example: wireless/long distance telecom,
cable/satellite/dsl
Monopolistic Competition
Many relatively small firms Freedom of entry/exit Differentiated products > brand
preferences Market failure: excess capacity
Is variety really the spice of life?
Make Way for Advertising
Advertising persuades, helps build brand
PCs: Dell, HP/Compaq, Gateway, IBM …
MP3 Players Wireless telephony
Incentives for innovation? Monopolist has less incentive to innovate
Already has some profit Cost reduction is spread over smaller output
Monopolist has relatively more incentive for minor than for major innovations
Kenneth Arrow in Nelson, R. (ed.), The Rate and Direction of Inventive Activity, Princeton University Press (1962). Cited by Prof. Bronwyn H. Hall, Berkeley, Economics 124
Economics and Innovation (1/3)
Schumpeter’s first “model of innovative activity suggests that ease of entry will promote innovation and that small- and medium-sized enterprises (SMEs) will most often be the vehicles of technological advance.” [Martin 1999]
Economics and Innovation (2/3)
The “Schumpeter of Capitalism, Socialism, and Democracy… conceived of technological progress as emanating from the industrial research laboratories of large firms that enjoyed positions of static market power.” [Martin 1999]
Economics and Innovation (3/3)
After debating these two viewpoints, the consensus seems to be that “the level of investment in research and development is likely to be too low, from a social point of view, whether market structure is nearly atomistic, a highly concentrated oligopoly, or something in between.” [Martin 1999]
Summary Theoretical Foundation
Communications, Diffusion of Innovation
Historical Context Applications
Personal, Institutional (for profit, non profit, government)
Implications
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