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Chapter 8 - Continued

Economics of Information. Chapter 8 - Continued. Joe Pendergrass. Alliances Can Spark Positive Feedback. Market share. Battle Zone. Time. Who to consider? Customers Suppliers Rivals Complements. Assembling Alliances. What will it take to attract them? When to align?.

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Chapter 8 - Continued

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  1. Economics of Information Chapter 8 - Continued Joe Pendergrass

  2. Alliances Can Spark Positive Feedback Market share Battle Zone Time

  3. Who to consider? • Customers • Suppliers • Rivals • Complements Assembling Alliances What will it take to attract them? When to align? Caveat – Do not give up control of competitive advantage. Example: Java

  4. Give pivotal customers special deals to join an alliance. Example – Microsoft and Wall Street Journal • Do not offer deals so good that they preclude other key alliances. • Solution – provide pivotal customers temporary benefits. Aligning with Pivotal Customers

  5. Align risk of failure with responsibility. • Lower bankruptcy/distress costs by shifting risk to the party able to bear the cost. • Attempt to shift risk to government or monopoly. Example – Smart cards in Europe Who Should Bear the Risk of Failure?

  6. Alliances can be sidestepped if positive feedback can be ignited by: • Current market position • Technical capabilities • Control over intellectual property rights • Example - Nintendo When Are Alliances Unnecessary?

  7. Opens networks to other networks • Allows fixed costs of infrastructure to be spread over larger customer base • Introduces new challenges in determining proper pricing • Example – Postal Services Interconnection Among Allies

  8. Cooperation to increase joint profits • Standards game – strong player vs. weak player • Game of chicken • Sometimes, a standards war is inevitable: consumers value variety, price competition from standardized product standard would erode products, high confidence Avoiding a Standards War Cooperate Fight Cooperate 5,5 2,10 Fight 10,2 0,0

  9. Microsoft and Netscape • Xerox and Ethernet • Adope Postscript • Microsoft ActiveX Example Alliances • Threats to managing open standards • No clear sponsor • Who will invest to keep the standard alive (Tragedy of the Commons)

  10. Do you really need allies to compete effectively in the network market? (Microsoft, Sun, Dell) • How does finding “how your standard will affect the market” help in recognizing natural allies? (modem industry) • How different is the effect of standards on a networked market as compared to the traditional market? • Challenges in managing alliances – sheer quantity of alliances, inter-relationships between alliances • http://www.orgnet.com/netindustry.html • Regulatory issues Food for Thought

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