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
according 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 oft en it reflected anticipated profi ts 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.
