lecture 5 Flashcards
what are the Properties of digital goods
- Digital goods can be easily replicated
- Digital goods can be easily distributed
- Digital goods have an unusual cost structure
explain the point that Digital goods have an unusual cost structure
- High cost of producing the first copy (high fixed costs)
- Low or zero costs of producing the second, third,… (low variable costs)
- Creation costs are ‘sunk’ (and not easily recoverable)
- No capacity-based limitations on production
So, digital goods are costly to produce but inexpensive to reproduce
what are the Forms of Differential Pricing
Personalized pricing
Versioning
Group pricing
what is Personalized pricing
– Sell to each user at a different price
– IT can better enable personalized pricing (e.g., purchasing pattern)
what is Versioning
– Offer a product line and let users choose
what is Group pricing
– Based on group membership/identity (e.g., student discounts)
further explain Personalized Pricing
Know your customer
– Directly (e.g., registration) and indirectly (e.g., clickstream)
Personalize both product and pricing
– How travel agents personalize: put together a travel package for clients
interested in deep sea fishing that includes luxury hotels and services.
Use promotions to measure demand – Market research is inexpensive on the Internet
further explain Versioning
Different products, different prices
LexusNexus offers a different price to each class of users (corporate, small biz, gov. edu) time of access (evening or day), how much you use the database (volume discount)
Different products with varying product quality (offer full product line with different versions matching different needs)
Maximize both value to customer (y-axis) and your share of this value (x-axis)
what are the Common dimensions of versioning
Comprehensiveness (all vs. selected features; v. low incremental cost
Timeliness (current vs. delayed stock quotes; hard-cover vs. paperback; early adopters willing to pay more)
Access channel (web-based vs. offline)
Convenience (full-week rental vs. two days)
Resolution or sound quality (e.g., basic vs. gold subscription to networking site)
Annoyance (nagware in shareware to remember to pay)
Speed (IBM installed chip to slow printers!)
Support (commercial OSS vs. free OSS)
So you need to version and price information products according to factors that discriminate among customers
further explain Group Pricing
Same product, different prices for different groups
Identifygroupswillingtopayless,offerthemlowerprices Need to be able to identify group membership easily
Examples of group pricing
Wall Street Journal, Microsoft Office, movie tickets, magazines,…
explain Group pricing and digital piracy
Piracy lowers a consumer’s willingness to pay
Identify ‘high-piracy’ groups, offer them lower prices
what is Bundling
Offering two or more products where at least one
product is provided at an incremental price less
than its stand-alone price
Different customers value different features
differently - willingness to pay for the bundle is less dispersed than the willingness to pay for the components
If you can’t figure out who values what, bundling is useful…
explain Network Effects
The value of a product or service increases as the number of users grow (more users = more value)
When network effects are present what happens
– The value of a product or service increases as the
number of users grows
– They’re among the most important reasons you’ll pick one product or service over another
what are One-sided markets
– Comprised of a single class of users (e.g., IM users) – Same-side exchange benefits
what are Two-sided markets
– Comprised of two distinct categories
of network participants (e.g., game
console owners & game developers), both of which that are needed to deliver value for the network to work
– Cross-side exchange benefits
what is Network Effects aka
Network externalities
what is Metcalfe’s Law
The value of a network increases in proportion to the square of the number of participants
Network externalities
Metcalfe’s Law: The value of a network increases in proportion to the square of the number of participants.
Creates a virtuous cycle: what is it
– eBay’s success attracts more success
– Netflix had a new way of reaching customers – Long Tail Business
– eBay different in new way of reaching sellers – Long Tail in item availability.
summarize network effects
More units consumed –> higher value per unit Success feeds on itself, ‘winner takes all’
Expectations are important
what is Positive feedback
when a firm becomes successful, its past and current success make it likely to succeed in the future
‘…success feeds on itself, the strong get stronger…’
when does positive feedback happen
Morecustomers->lowerunitcost(supply-sideeconomiesof scale)
Morecustomers->larger‘network’->morevaluableproduct (demand-side economies of scale)
what are the Possible consequences of positive feedback
Dominance of a single firm or technology (MS Windows)
Dominance of an inferior technology that got an early lead (Beta
vs. VHS)
what is Collective Switching Costs
- Network effects lead to substantial collective switching costs
- Even worse than individual lock-in (investments, social norms, psychological effects)
- Due to coordination costs
- Example: QWERTY (slow typing to reduce jam)
what are the Sources of value for network effects
Exchange
Staying power
Complementary benefits
explain Exchange
A product/service becomes more valuable when more users join because its users can communicate with more people
explain Staying power
– Products/services with greater numbers of users
have a stronger long-term viability.
– Switching costs enhances staying power.
explain Complementary benefits
Products/services that add additional value to the network
How are network markets different?
Early, fierce competition
Winner-take-all
The best product/service doesn’t always win
explain Early, fierce competition
– Because “Tipping” can be remarkably swift due
to network effects. (e.g., Blu-ray vs. HD-DVD)
eplain Winner-take-all
– Natural monopoly
The major player can charge customers more and
Can enjoy substantial bargaining power over partners
explain The best product/service doesn’t always win
– Inferior products that move first may dominate
E.g., PS2 vs. Xbox
what are Strategies for competing in markets with network effects
Move early (Yahoo! Auctions vs. eBay in Japan)
Subsidize product adoption (PayPal)
Leverage viral promotion (Skype, Facebook feeds)
Expand by redefining the market (Nintendo Wii)
– Or through convergence (iPhone)
Alliances and partnerships (NYCE vs. Citibank)
Leverage distribution channels (Java with Netscape; Microsoft bundling Media Player with Windows)
Seed the market with complements (Blu-ray DVD player in PS3 console; Adobe Acrobat reader)
Encourage the development of complementary goods
– Offering resources, subsidies, free services (Microsoft; Apple)
– Venture capital (Facebook’s fbFund)
Leverage backward compatibility
– Provide adapter (Intel- & Power PC-based Mac; Bootcamp)
Rivals: Be compatible with the leading network (Microsoft’s Live Maps and Google Maps)
Incumbents: Close off rival access and constantly innovate (AOL; Skype; Mac vs.
Windows)
Large, well-known followers: Pre- announcements)
– Cause potential adaptors to delay a purchase decision
– Only work if a firm is large enough to pose a credible threat to current market participants
– Timing is important (not too early)
The performance of a new technology is likely to be better if:
It is a radical departure from an existing technology
It does not attempt to build in compatibility with the existing technology
The performance of a new technology is likely to be better if:
It is a radical departure from an existing technology
It does not attempt to build in compatibility with the existing technology
However:
Adoption is more rapid if the technology is backward compatible
Network effects aren’t much use if nobody migrates to your technology`
A firm benefits from generating network effects if it:
- Is the only supplier of the product (control)
* Tries to get a very large user base rapidly (openness)
A firm benefits from generating network effects if it:
• Is the only supplier of the product (control)
• Tries to get a very large user base rapidly (openness)
However:
- Adoption is more rapid with open standards
* Profit margins are much higher with proprietary standards
