Information is expensive to produce but very cheap to copy and distribute.
From the users’ viewpoint, e-products have four key attributes: experience, overload,
switching costs and network externalities. Buyers’ need to experience explains why sellers allow sampling and browsing. Sellers also invest in a good reputation to reduce the need for buyers to sample. Potential information overload explains why specialist agents develop to pre-screen material.
Switching costs make future opportunities depend on current choices. Users should
therefore take a long-run view from the outset. It is optimal for sellers to subsidize initial use
and to manufacture artificial switching costs using reward schemes for loyalty.
Network externalities arise when the value of a network depends on how densely it is
populated. Producers will respond by subsidizing early entry to the network.
Information products, with high fixed costs but low marginal cost, are potential monopolies.
R&D, learning by doing, switching costs and network externalities may lead to natural
monopolies. Where niche markets are smaller, monopolistic competition may prevail. Many
existing markets are contestable by new entrants, so many monopolies are temporary.
Monopolists want to price discriminate when users differ. Information technology may allow
personalized pricing. Otherwise, sellers produce different versions of the product, to make
discrimination easier, or bundle different products to reduce the need for discrimination.
Standards are a key feature of a network. Initially, there is competition between networks to
set the standard. Once one standard is dominant, there is competition within the network to
supply to that standard.
Share prices of dot.com companies rose incredibly rapidly in the late 1990s. Since January
2000 many share prices have fallen by 80 or 90 per cent and some firms went bankrupt.
This does not mean that the new technologies were unwanted. More often it reflected
anticipated profits being delayed or competed away by new entrants.
An asset price bubble is a self-fulfilling prophecy about a departure of the asset price from
the fundamentals. Staying on a bubble requires an acceleration of price growth. Hence
eventually all bubbles burst.
People know bubbles will burst, but if they knew when a bubble would burst they would get
out in advance, bringing forward the burst. The bursting of a bubble is a random event.
