Session 8 - Session 8: Pricing & Midterm Review Bin Gu,...

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Bin Gu, Ph.D. Assistant Professor of IM Bin.Gu@mccombs.utexas.edu Ph: 512-471-1582; Fax: 512-471-0587
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Next Class Midterm 1 In class: 75 mins Close book, close notes. Action Arrive on time Format Multiple choices Short answers Mini case questions
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Summary of MSFT case . . What did we learn? Software exhibits certain unique characteristics: High upfront costs Low marginal costs Potential network effect Need complements Need interoperability Once deeply entrenched vendors have huge bargaining power High switching costs Lock-in Huge economies of network Huge economies of scale Double whammy!
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Economic Characteristics Economies of Scale High fixed cost Low variable/marginal cost Marginal implies the cost or revenue from additional unit. Software packages including MS Office Suit etc. exhibit a unique feature that they have large upfront cost (for development and testing) and negligible marginal cost. Once software is created then the cost of making additional unit is almost zero (just duplicating). The average cost decreases as more products are produced
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Economic Characteristics Network externality As more users use the product, the value of using these products/services for users grows dramatically. Direct network effect
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Session 8 - Session 8: Pricing & Midterm Review Bin Gu,...

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