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FUNDAMENTALS OF INFORMATION GOODS Atoms = A = in a beer, liquid Bits = B = in a beer, taste, calories, price - In beer, the atom is most important but in music, bit is most important Digital/Information Goods (recipes, movies) - anything that can be expressed as a string of 1s and 0s (bits) - collection of symbols - expensive to produce, cheap to reproduce: high fixed costs, low marginal cost - utility depends on the arrangement of the symbols - becoming increasingly important, transforming from atoms to bits - new technologies make it possible to “get rid” of the physical component of products… ex. CDs to Itunes, Books to Kindle - computer networks allow people to connect/exchange info… ex. facebook Properties of Information Goods - MC=0 - economies of scale achieved at Q=infinity, MC=AC - natural monopoly, otherwise very competitive - Experience goods - consumers cannot tell quality/ value before consuming them - difficult to sell at high prices - harder to sell, info not transparent, info asymmetry ads, trials, reviews - Public goods - non exclusive, non rival - hard to make money when selling public good, money through donations - limitations with laws, technology property - Value Volatility - make items less durable to sell more: if infinite, new software versions Principal Forms of Intellectual Property Protection - Patent: protects any new and useful process etc. 20 year term: novel/useful - Trademark: protects designations used to distinguish items from one manufacturer from another, renewable: distinctive - Copyright: protects works of original author, 100 years: original work - Trade Secret: protects any valuable intellectual property, secret Newspaper Industry - newspaper industry dying due to internet access, the news is a public good, technology (craigs list) - surviving due to consumers who pay to read online PRICING INFORMATION GOODS Three Degrees of Price Discrimination 1. Personalized pricing = find out what each customer is willing to pay, charge that 2. Versioning = multiple products, self-selection 3. Group pricing = student discounts Versioning - don’t always have information, consumers self select between items - multiple versions sold at different prices
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- example : books in hard cover, paperback - negatives of versioning - consumers evaluations are drastically different for information goods - cheaper to produce multiple versions of information goods - wide distribution means potential customer base is more heterogenous - versioning dimensions - user interface/capability - speed of operation - quality reduction - annoyance (pop ups) - customer support Bundling - distribution is not a problem with digital goods because MC=0 - offer a package of goods: Microsoft office - less consumer surplus, dead weight loss - willingness to pay is more predictable IT and COMPETITIVE ADVANTAGE Porter Five Forces Model of Competition
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