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Chapter 36 89
The final model is a nice little model of sharing. The final result says, basically,
that producers make more money by allowing a product to be shared if it is
cheaper to share a single copy that it is to produce multiple copies. This is a
little surprising at first, but on reflection it makes a lot of sense. Again, it is
useful to discuss examples: video rentals, library books, interlibrary loan, rental
skis, rental cars, etc.
Information Technology
A. Systems competition
1. info tech components are complements
2. worry about complementers as much as competitors
B. CPU and OS as complements
1. price of system is p1+p2so demand is D(p1+p2)
2. each setting price alone ignores spillover effect
C. Lock-in
1. cost of switching
D. Example of switching ISPs
1. c= cost of providing service
a) consumer switches if
b) implies d=s, which means supplier covers switching costs
6. competition forces profit to zero
a) implies
b) interpretation: ISP invests in discount, earns back premium over cost
in subsequent periods
E. Network externalities occur when the value of a good to one consumer depends
F. Model: think of 1,000 people who have willingness to pay of v=1,2,3,...,1000..
90 Chapter Highlights
G. But now suppose that the value of a fax machine is vn,wherenis the number
of people who purchase a fax machine
1. if the price is p, then the marginal person satisfies
2. everyone with value greater than this person buys the fax machine, so
3. putting these two equations together gives us
4. note the peculiar shape of this demand curve!
H. Suppose the fax machines are produced at a constant marginal cost of c
1. there will then be 3 levels of output where demand equals supply
I. Rights management
1. offering more liberal terms and conditions increases value, decreases sales
2. baseline case
3. more liberal terms and conditions
a) Y=βy with β>1
b) P(Y)=αp(Y)withα>1
c)
d)
α
4. conclusions
a) same amount consumed
J. Sharing intellectual property
1. examples of sharing
2. monopoly profit maximization: p(y)y−cy −Fgives output ˆy.
3. What if good is shared among kusers? If ycopies produced, x=kx copies
K. profit maximization
Chapter 36 91
L. rearrange:
M. Marginal cost in this problem is (c/k+t). Howdoesthiscomparetomarginal
cost in original problem?
1. Profits will be larger when rental is possible when
or,
k
a) If kis large, this reduces to t<c.
2. Interpretation: is it cheaper to produce an extra copy or have an existing
copy shared among more consumers?
Chapter 36 89
The final model is a nice little model of sharing. The final result says, basically,
that producers make more money by allowing a product to be shared if it is
cheaper to share a single copy that it is to produce multiple copies. This is a
little surprising at first, but on reflection it makes a lot of sense. Again, it is
useful to discuss examples: video rentals, library books, interlibrary loan, rental
skis, rental cars, etc.
Information Technology
A. Systems competition
1. info tech components are complements
2. worry about complementers as much as competitors
B. CPU and OS as complements
1. price of system is p1+p2so demand is D(p1+p2)
2. each setting price alone ignores spillover effect
C. Lock-in
1. cost of switching
D. Example of switching ISPs
1. c= cost of providing service
a) consumer switches if
b) implies d=s, which means supplier covers switching costs
6. competition forces profit to zero
a) implies
b) interpretation: ISP invests in discount, earns back premium over cost
in subsequent periods
E. Network externalities occur when the value of a good to one consumer depends
F. Model: think of 1,000 people who have willingness to pay of v=1,2,3,...,1000..
90 Chapter Highlights
G. But now suppose that the value of a fax machine is vn,wherenis the number
of people who purchase a fax machine
1. if the price is p, then the marginal person satisfies
2. everyone with value greater than this person buys the fax machine, so
3. putting these two equations together gives us
4. note the peculiar shape of this demand curve!
H. Suppose the fax machines are produced at a constant marginal cost of c
1. there will then be 3 levels of output where demand equals supply
I. Rights management
1. offering more liberal terms and conditions increases value, decreases sales
2. baseline case
3. more liberal terms and conditions
a) Y=βy with β>1
b) P(Y)=αp(Y)withα>1
c)
d)
α
4. conclusions
a) same amount consumed
J. Sharing intellectual property
1. examples of sharing
2. monopoly profit maximization: p(y)y−cy −Fgives output ˆy.
3. What if good is shared among kusers? If ycopies produced, x=kx copies
K. profit maximization
Chapter 36 91
L. rearrange:
M. Marginal cost in this problem is (c/k+t). Howdoesthiscomparetomarginal
cost in original problem?
1. Profits will be larger when rental is possible when
or,
k
a) If kis large, this reduces to t<c.
2. Interpretation: is it cheaper to produce an extra copy or have an existing
copy shared among more consumers?
