Chapter19

Chapter19 - MANAGERIAL ECONOMICS An Analysis of Business...

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1 MANAGERIAL ECONOMICS An Analysis of Business Issues Howard Davies and Pun-Lee Lam Published by FT Prentice Hall
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2 Chapter 10: Network Economics and the Information Sector Objectives: To examine the special features of ‘network’ industries To evaluate the debate over the impact of these industries on the working of a market economy
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3 Is it a New World? Macro-economic laws suspended growth, high output, high employment without inflation Dot.com firms with no profits had very high valuations BUT Shapiro and Varian (1999) Technology changes, Economic laws do not
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4 The Information Sector has some unusual features On the revenue side - network effects On the cost side - sunk costs, high fixed cost very low marginal cost Overall - “increasing returns” which might threaten the effective working of the market economy - MAYBE
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5 The Information Sector has some unusual features Not usually covered in elementary texts Require some new analytical tools Analysis not really ‘settled down’ yet Shapiro and Varian Liebowitz and Margolis Economides
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6 Networks “Nodes” and “links” in computing, in marketing, in sociology, in economics (firms or people and cables or radio signals) Network effects the value of a network product increases as more are connected to it, or use it
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7 Network Effects may lead to Externalities Externality - a cost or a benefit which is not taken into account by the decision-maker pollution - a negative externality vaccination - a positive externality the benefit others get when I join a network or use a standard product - a positive externality Externalities lead to ‘market failure’ but the problem may be resolved by ‘internalising’ the externality - perhaps through ownership
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8 See Liebowitz and Margolis Figure 19.1 AB =AR MB=MR Marginal Cost MC * P * Q Q * No of participants
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9 A Demand Curve for a Network Can Be Derived See p.402 Under perfect competition the network is ‘too small’ Under monopoly , smaller and more expensive Under Cournot competition, with one standard, varies between the two above
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Chapter19 - MANAGERIAL ECONOMICS An Analysis of Business...

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