11 Digital Economics Flashcards
Comment on the costs of digital goods
Digital goods are costly to produce but cheap to reproduce.
- > low marginal costs
- > high fixed costs
draw the curves of marginal costs over quantity of digital and non-digital goods
What are the sales strategies/philosophies for the two types?
see p.12
non-digital good: convex curve with a minimum -> OPP
-> learning effects let the marginal costs drop in the beginning
- > limited resources will make marginal costs increase again
- >”sell up to an optimal point of production”
digital goods
- only the first copy has very high MC
- MC of additional copies is negligible (maybe slightly increasing because of software maintenance)
- > “sell as much as you can”
name the formula for marginal costs
MC(y) = [c(y + dy) - c(y) ] / dy
dy: delta y
c: variable costs
What happens in a market for digital goods with perfect competition?
- prices are zero or almost zero
- no-one would make any profit
- the high fixed costs/initial costs won’t get balanced out
what alternative market structure is possible in a market for digital goods?
Combination of high sunk costs and economies of scale often lead to the emergence of quasi-monopolies:
- Quasi-monopoly based on cost leadership
- Quasi-monopoly based on product leadership (incl. first mover advantage)
- Quasi-monopoly based on lock-in effect (switching costs for users) and network externalities (every user benefits from more users)
what difference does it make for providers if they are the monopolist?
- monopolists can set the price
- > maximize producer surplus (higher price)
- price differentiation/ flexibles prices to meet different willingness to pay and therefore maximize their profit
compare shortly static and flexible pricing
static:
- homogeneous homo oeconomicus
- every customer has the same utility function
flexible:
- heterogeneous homo oeconomicus
- exploit differences in customers utility functions
Describe the three degrees of flexible pricing and give examples
1° personal pricing
- each customer receives a personal price, depending his willingness to pay
- > max revenue for the provider assuming we know the exact willingness to pay for every customer
- > might be seen unfair
e. g.: personal interest rate for loan
2° Versioning and Bundling
- different versions of products and services
- different bundles of products
e. g.: Software packages like MS Office
3° Group pricing
- price depends on your customer group
- > student tickets, family price, …
How does “self-selection” work in the case of degree 2 flexible pricing?
- absence of knowledge about willingness to pay
- create different versions (high-end to low-end) or bundles and try to gain knowledge about willingness to pay by self-selection
What’s the best strategy in the presence of heterogeneous customers?
mixed bundeling
what strategies do exist when bundling complementary goods?
integrate: set price yourself
collaborate: set price together and share revenue
negotiate: I‘ll cut mine, you cut yours
nurture: work with them to lower cost
commercialize (kommerzialisieren): make their industry more competitive
Explain what the lock-in effect is and how it works
- customers are to some degree forced to stay with a product/ service provider
- investments in complementary products or services make switching less attractive (investments in training or new hardware)
- > high switching costs
- Incompatibility is a barrier for competitors or customers - > reason for switching costs
- switching costs are especially high in markets with low competition
Examples:
from SAP to Oracle
from AppleOS to Microsoft
Explain sellers strategy to drive a lock-in effect
Seller strategies
Investment in customer base
->E.g. promotion and education to establish a standard
Design products so that customers want to invest in your technology again
->E.g.loyalty programs or gratification for good feedback
Leverage on selling complementary products to the installed base
->E.g.establish digital ecosystem
Under which conditions is a lock-in effect likely to appear?
non-competitive markets where a ‘unique’ product is highly valuable for the customer.
providers have a high market power
-> sellers market
Explain buyers strategy to avoid a lock-in effect
Buyers strategy
Bargain hard before you buy and think ahead
-> E.g. in terms of updates, resources, service costs
Minimize switching costs
->E.g. by insisting on standard formats, convenient APIs, etc.
If feasible diversify and don’t depend on a single provider
-> E.g. use substitutional programs and keep up knowledge
