Ch34 - Chapter Thirty-Four Information Technology...

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Chapter Thirty-Four Information Technology
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Information Technologies Computers, answering machines, FAXes, pagers, cellular phones, … Many provide strong complementarities. E.g. email is useful only if lots of people use it -- a network externality . And computers are more useful if many people use the same software.
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Information Technologies But then switching technologies becomes very costly -- lock-in . E.g. Microsoft Windows. How do markets operate when there are switching costs or network externalities?
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Producer’s cost per month of providing a network service is c per customer. Customer’s switching cost is s. Producer offers a one month discount, d. Rate of interest is r.
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All producers set the same nondiscounted price of p per month. When is switching producers rational for a customer?
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Cost of not switching is p p r + .
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Cost of not switching is Cost from switching is p p r + . p d p r s - + + .
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Cost of not switching is Cost from switching is Switch if p p r + . p d p r s p p r - + + < + . p d p r s - + + .
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Cost of not switching is Cost from switching is Switch if I.e. if p p r + . p d p r s p p r - + + < + . p d p r s - + + . d s .
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Switch if I.e. if Producer competition will ensure at a market equilibrium that customers are indifferent between switching or not p d p r s p p r - + + < + . d s . d s = .
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At equilibrium, producer economic profits are zero. I.e. p d c p c r - - + - = 0.
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At equilibrium, producer economic profits are zero. I.e. Since , at equilibrium d s = p d c p c r - - + - = 0. p c p c r s - + - = .
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At equilibrium, producer economic profits are zero. I.e. Since , at equilibrium I.e. present-valued producer profit = consumer switching cost. d s = p d c p c r - - + - = 0. p c p c r s - + - = .
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Externalities Individuals 1,…,1000. Each can buy one unit of a good providing a network externality. Person v values a unit of the good at
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This note was uploaded on 01/06/2012 for the course ECON 102 taught by Professor Goodhart during the Spring '11 term at Abu Dhabi University.

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Ch34 - Chapter Thirty-Four Information Technology...

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