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Economics of Information MGT 523 Cooperation and Compatibility

Economics of Information MGT 523 Cooperation and Compatibility. Feb 13 th , Tuesday Surya D Pathak Vanderbilt University, Nashville, TN. Outline. Different strategies to compete in the network markets How standards change the “Game” Who wins or who loses from this “Game”

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Economics of Information MGT 523 Cooperation and Compatibility

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  1. Economics of InformationMGT 523Cooperation and Compatibility Feb 13th, Tuesday Surya D Pathak Vanderbilt University, Nashville, TN

  2. Outline • Different strategies to compete in the network markets • How standards change the “Game” • Who wins or who loses from this “Game” • Formal Standard Setting • Tactics involved in Formal Standard setting

  3. Introduction • Strategies in a network market are distinct from strategies in the traditional markets • Questions like • Is a open standard needed? • Who are the allies? • Can the allies launch your technology while you still have control over the way it evolves?

  4. How Standards change the Game • When negotiating standards, beware of companies that deep down have no interest in the development of a successful standard • Microsoft in the Software industry • HDTV standard, DVD standardization issues To figure out who needs a standard you need to envision, how the market will evolve with or without a standard

  5. Expanded Networks • Standards enhance compatibility or interoperability thus generating more value for the consumers by making the network larger. • VHS, 3.5” floppy disks • PAL, SECAM,NTSC television standards • US Governments efforts on standardizing the web based learning environments

  6. Reduced Uncertainty • Standards reduce technology risks faced by consumers, accelerates acceptance of new technology (ATM) • “Confidence breeds success, doubt spells doom” • Confusion over incompatible products can be disastrous e.g. AM stereo radio, 56 Kbps modem

  7. Reduced Consumer Lock-In • A truly open standard, makes the consumer feel less concerned about Lock-In. • CD technology (Sony, Philips and DV associates) • Sun One project, Microsoft’s .net platform

  8. Competition for the market vs competition in the market • Early battle of dominance vs battle for market share • Aggressive pricing and Lock-In reduces • E.g. computer accessories like “mouse” • Consumers can suffer if they buy a open standard, which is later hijacked • Motorola, Dow Jones (DJIA)

  9. Competition on Price vs. Features • More standardized a product is, the lesser are the chances that suppliers will differentiate the product on features. • At this point the companies concentrate on the price. • E.g CD Read/Write drives, Audio Tape technology

  10. Competition to offer proprietary extension • Differentiate products based on proprietary extensions to standard products. • PC Industry • Intel, Dell • Computer Hard drive industry (Maxtor etc.)

  11. Component vs System Competition • Standardization shifts the locus form systems to components • Nintendo vs Sega • Companies can do well selling specialized components ( HP, Sony) Specialists thrive in Mix-match environment whereas Generalists Tend to thrive in the absence of compatibility

  12. Who wins and who loses from Standards • Consumers • Complementors • Incumbents • Innovators

  13. Consumers • Welcome standards • Enjoy large network externalities • Far less chance of Lock-In • Loss of variety (QWERTY) • No more aggressive penetration pricing (ISP’s) • Standards that don’t quiet work (Sound cards and video cards a decade ago, at present Software )

  14. Complementors • Sellers of complimentary products welcome standards. (AOL) • Influential Complementors can affect the choice of Standards. • E.g The music and movie studios have been historically influencing the standardization of consumer electronic products • The “XML” consortium.

  15. Incumbents • Established incumbents do not always prefer the development of a new standard. • RCA in the television industry • Atari/Nintendo • Incumbents might • Block the entry of new standards (AT&T) • Rush new products with backward compatibility(Atari) • Ally itself with the new technology to benefit from its brand name (Sony/Philips in the CD industry, Microsoft in the XML industry

  16. Innovators • Companies developing new technologies collectively tend to welcome standards • E.g. Smart cards (VISA, Master Card)

  17. Formal Standard Setting • UL, IEEE, ITU • ACM • SIGART • SIGCOMM • SIGGRAPH

  18. Tactics in Formal Standard Setting • Showing up at a standards meeting can go a long way towards protecting a company’s interest (AT&T, Motorola, Rockwell). • Don’t automatically participate (Motorola did not participate in ITU T.30, Dell’s VESA bus standard) • Keep up your Momentum (e.g. CBS)

  19. Contd… • Beware of Vague promises (ITU) • Search carefully for blocking patents (Run Length Encoding Algorithm, LZW Compression) • Consider building an installed base preemptively (3COM, Rockwell/Lucent)

  20. Food for Thought • 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?

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