Ch34 Information Technology.ppt

Chapter Thirty-Four,Information Technology,Information Technologies,Computers,answering machines,FAXes,pagers,cellular phones,Many provide strong complementarities.E.g.email is useful only if lots of people use it-a network externality.And computers are more useful if many people use the same software.,Information Technologies,But then switching technologies becomes very costly-lock-in.E.g.Microsoft Windows.How do markets operate when there are switching costs or network externalities?,Competition&Switching Costs,Producers cost per month of providing a network service is c per customer.Customers switching cost is s.Producer offers a one month discount,d.Rate of interest is r.,Competition&Switching Costs,All producers set the same nondiscounted price of p per month.When is switching producers rational for a customer?,Competition&Switching Costs,Cost of not switching is,Competition&Switching Costs,Cost of not switching isCost from switching is,Competition&Switching Costs,Cost of not switching isCost from switching isSwitch if,Competition&Switching Costs,Cost of not switching isCost from switching isSwitch if I.e.if,Competition&Switching Costs,Switch ifI.e.ifProducer competition will ensure at a market equilibrium that customers are indifferent between switching or not,Competition&Switching Costs,At equilibrium,producer economic profits are zero.I.e.,Competition&Switching Costs,At equilibrium,producer economic profits are zero.I.e.Since,at equilibrium,Competition&Switching Costs,At equilibrium,producer economic profits are zero.I.e.Since,at equilibriumI.e.present-valued producer profit=consumer switching cost.,Competition&Network Externalities,Individuals 1,1000.Each can buy one unit of a good providing a network externality.Person v values a unit of the good at nv,where n is the number of persons who buy the good.,Competition&Network Externalities,Individuals 1,1000.Each can buy one unit of a good providing a network externality.Person v values a unit of the good at nv,where n is the number of persons who buy the good.At a price p,what is the quantity demanded of the good?,Competition&Network Externalities,If v is the marginal buyer,valuing the good at nv=p,then all buyers v v value the good more,and so buy it.Quantity demanded is n=1000-v.So inverse demand is p=n(1000-n).,Competition&Network Externalities,0,1000,n,Willingness-to-pay p=n(1000-n),Demand Curve,Competition&Network Externalities,Suppose all suppliers have the same marginal production cost,c.,Competition&Network Externalities,0,1000,n,Demand Curve,Supply Curve,c,Willingness-to-pay p=n(1000-n),Competition&Network Externalities,What are the market equilibria?,Competition&Network Externalities,What are the market equilibria?(a)No buyer buys,no seller supplies.If n=0,then value nv=0 for all buyers v,so no buyer buys.If no buyer buys,then no seller supplies.,Competition&Network Externalities,0,1000,n,Demand Curve,Supply Curve,(a),c,Willingness-to-pay p=n(1000-n),Competition&Network Externalities,0,1000,n,Demand Curve,Supply Curve,n,(a),c,Willingness-to-pay p=n(1000-n),Competition&Network Externalities,What are the market equilibria?(b)A small number,n,of buyers buy.small n small network externality value nvgood is bought only by buyers with nv c;i.e.only large v v=c/n.,Competition&Network Externalities,0,1000,n,Demand Curve,Supply Curve,n,(b),n”,(c),(a),c,Willingness-to-pay p=n(1000-n),Competition&Network Externalities,What are the market equilibria?(c)A large number,n”,of buyers buy.Large n”large network externality value n”vgood is bought only by buyers with nv c;i.e.up to small v v”=c/n”.,Competition&Network Externalities,0,1000,n,Demand Curve,Supply Curve,n,(b),n”,(c),(a),c,Which equilibrium is likely to occur?,Willingness-to-pay p=n(1000-n),Competition&Network Externalities,Suppose the market expands whenever willingness-to-pay exceeds marginal production cost,c.,Competition&Network Externalities,0,1000,n,Demand Curve,Supply Curve,n,n”,c,Which equilibrium is likely to occur?,Willingness-to-pay p=n(1000-n),Competition&Network Externalities,0,1000,n,Demand Curve,Supply Curve,n,n”,c,Which equilibrium is likely to occur?,Willingness-to-pay p=n(1000-n),Unstable,Competition&Network Externalities,0,1000,n,Demand Curve,Supply Curve,n”,c,Which equilibrium is likely to occur?,Willingness-to-pay p=n(1000-n),Competition&Network Externalities,0,1000,n,Demand Curve,Supply Curve,n”,c,Which equilibrium is likely to occur?,