lecture 5 Flashcards

1
Q

what are the Properties of digital goods

A
  1. Digital goods can be easily replicated
  2. Digital goods can be easily distributed
  3. Digital goods have an unusual cost structure
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2
Q

explain the point that Digital goods have an unusual cost structure

A
  • 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

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3
Q

what are the Forms of Differential Pricing

A

Personalized pricing
Versioning
Group pricing

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4
Q

what is Personalized pricing

A

– Sell to each user at a different price

– IT can better enable personalized pricing (e.g., purchasing pattern)

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5
Q

what is Versioning

A

– Offer a product line and let users choose

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6
Q

what is Group pricing

A

– Based on group membership/identity (e.g., student discounts)

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7
Q

further explain Personalized Pricing

A

 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

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8
Q

further explain Versioning

A

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)

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9
Q

what are the Common dimensions of versioning

A

 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

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10
Q

further explain Group Pricing

A

Same product, different prices for different groups

 Identifygroupswillingtopayless,offerthemlowerprices  Need to be able to identify group membership easily

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11
Q

Examples of group pricing

A

Wall Street Journal, Microsoft Office, movie tickets, magazines,…

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12
Q

explain Group pricing and digital piracy

A

 Piracy lowers a consumer’s willingness to pay

 Identify ‘high-piracy’ groups, offer them lower prices

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13
Q

what is Bundling

A

 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…

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14
Q

explain Network Effects

A

The value of a product or service increases as the number of users grow (more users = more value)

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15
Q

When network effects are present what happens

A

– 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

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16
Q

what are One-sided markets

A
– Comprised of a single class of users
(e.g., IM users)
– Same-side exchange benefits
17
Q

what are Two-sided markets

A

– 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

18
Q

what is Network Effects aka

A

Network externalities

19
Q

what is Metcalfe’s Law

A

The value of a network increases in proportion to the square of the number of participants

20
Q

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

A

– 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.

21
Q

summarize network effects

A

 More units consumed –> higher value per unit  Success feeds on itself, ‘winner takes all’
 Expectations are important

22
Q

what is Positive feedback

A

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…’

23
Q

when does positive feedback happen

A

 Morecustomers->lowerunitcost(supply-sideeconomiesof scale)

 Morecustomers->larger‘network’->morevaluableproduct (demand-side economies of scale)

24
Q

what are the Possible consequences of positive feedback

A

 Dominance of a single firm or technology (MS Windows)
 Dominance of an inferior technology that got an early lead (Beta
vs. VHS)

25
Q

what is Collective Switching Costs

A
  • 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)
26
Q

what are the Sources of value for network effects

A

Exchange
Staying power
Complementary benefits

27
Q

explain Exchange

A

A product/service becomes more valuable when more users join because its users can communicate with more people

28
Q

explain Staying power

A

– Products/services with greater numbers of users
have a stronger long-term viability.
– Switching costs enhances staying power.

29
Q

explain Complementary benefits

A

Products/services that add additional value to the network

30
Q

How are network markets different?

A

 Early, fierce competition
 Winner-take-all
 The best product/service doesn’t always win

31
Q

explain Early, fierce competition

A

– Because “Tipping” can be remarkably swift due

to network effects. (e.g., Blu-ray vs. HD-DVD)

32
Q

eplain  Winner-take-all

A

– Natural monopoly
 The major player can charge customers more and
 Can enjoy substantial bargaining power over partners

33
Q

explain  The best product/service doesn’t always win

A

– Inferior products that move first may dominate

E.g., PS2 vs. Xbox

34
Q

what are Strategies for competing in markets with network effects

A

 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)

35
Q

The performance of a new technology is likely to be better if:

A

 It is a radical departure from an existing technology

 It does not attempt to build in compatibility with the existing technology

36
Q

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:

A

 Adoption is more rapid if the technology is backward compatible
 Network effects aren’t much use if nobody migrates to your technology`

37
Q

A firm benefits from generating network effects if it:

A
  • Is the only supplier of the product (control)

* Tries to get a very large user base rapidly (openness)

38
Q

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:

A
  • Adoption is more rapid with open standards

* Profit margins are much higher with proprietary standards