ch.2outline - Chapter 2 I. The cost of producing...

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Chapter 2 I. The cost of producing information a. One of themost fundamental features of information goods is that their cost of production is dominated by the “first-copy costs.” b. Information delivered over a netework in digital for exhibits the first-copy problem in an extreme way: once the first copy of the info has been produced, additional copies cost essentially nothing. c. Info is costly to produce but cheap to reproduce d. In the language of economics, the fixed costs of production are large, but the cariable costs of reproduction are small e. This cost structure leads to substantial economies of scale : the more you produce, the loser the average cost of production. f. The dominant component of the fixed costs of producing info are sunk costs , costa that aren’t recoverable if production is halted. g. Sunk costs have to be paid up front before commencing production h. The variable cost of info production also have an unusual structure: the cost of producing an additional copy typically doesn’t increase, even if a great many copies are made. II. Costs and competition a. Information is costly to produce but cheap to reproduce b. Pnce the first copy of an info good has been produced, most costs are sunk and cant be recovered c. Multiple copies can be produced at roughly constant per unit costs d. There are no natural capacity limits for additional copies e. Markets for info wil not and cant look like text book perfect competitive markets in which there are many suppliers offering similar products, each lacking the ability to influence prices. f. “information commodity markets” don’t work because competitive forces tend to move the price toward marginal cost, the cost of producing an “additional” copy g. Market structures for information goods 1. The high sunk cost, low marginal costfeature of info markets has significant implications for the market structure of info industries.
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2. Sustainable market structures for information goods: a. The dominant firm model may or may not produce the best product, but by virtue of its size and scale economies it enjoys a cost advantage over its smaller rivals. b. In a differentiated product market we have a number of firms producing the same “kind” of information, but with many different varieties. 3. Classic time tested principles of competitive advantage: a. Differentiate your product . If you are in a differentiated product industry, you must add valkue to the raw information, thereby distinguishing yourself from the competition. b. Achieve cost leadership . If you are in a dominant firm industry, your strategy should be to achieve cost leadership through economies of scale and scope. 4.
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This note was uploaded on 04/26/2009 for the course MIS 301 taught by Professor Mccleod during the Spring '08 term at University of Texas at Austin.

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ch.2outline - Chapter 2 I. The cost of producing...

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