Chapter Thirty-Four Information Technology
Chapter Thirty-Four Information Technology
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
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
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?
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?
Competition Switching Costs 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
Competition & Switching Costs 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
Competition Switching Costs All producers set the same nondiscounted price of p per month. When is switching producers rational for a customer?
Competition & Switching Costs All producers set the same nondiscounted price of p per month. When is switching producers rational for a customer?
Competition Switching Costs Cost of not switching is p+
Competition & Switching Costs Cost of not switching is p p r +
Competition Switching Costs Cost of not switching is p+ Cost from switching is pd++s
Competition & Switching Costs Cost of not switching is Cost from switching is p p r + . p d p r − + + s
Competition Switching Costs Cost of not switching is p+ Cost from switching is p-d++s. Switch if p-d+2+s<p+
Competition & Switching Costs 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
Competition Switching Costs Cost of not switching is p+ Cost from switching is p-d+ +S Switch if p- l.e.if d>s
Competition & Switching Costs 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
Competition Switching Costs Switch if p-d+P+ss. Producer competition will ensure at a market equilibrium that customers are indifferent between switching or not→d=s
Competition & Switching Costs 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