MIS40890 – Economics IT & Digital Markets

Syllabus

MIS 40890. Course Title: Economics of Information Technology and Digital Markets

Lecturers: Dr. Moshe Yonatany and Mr Allen Higgins
UCD Centre for Innovation, Technology & Organisation (CITO)
c/o rm Q223, Quinn Building
UCD School of Business
University College Dublin
Belfield, D4
Ireland

Course Blog: http://economicsofdigitalgoods.blogspot.ie/

Module Description

The main goal of this course is to develop an understanding of the economic features of information technology and digital markets. The course will also present some of the seminal Economics papers related to information and technology. You should be able to apply principles covered in this subject to real-life cases and to analyze the effects of information on economic transactions, the effect of networks and technological platforms and the implications of pricing and bundling of information goods.

Learning Outcomes

Demonstrate familiarity with economic models of information technology and digital markets. You will be able to analyze, interpret and understand characteristics of information products and services in digital markets.
Motivation
The advances in Information Technology during the last decades are often compared to the Industrial Revolution. This is because technology is changing many products and services and may change the way we work, do business and maybe live.

Will the information, or digital, revolution be as disruptive as the industrial one? Some economists think that new technologies are not going to have the same effect on the economies of the future: ‘We wanted flying cars, instead we got 140 characters’; others think that ‘each new iteration of innovation delivers a technological jolt as powerful as all previous rounds combined’ (Economist, 12th January 2013).

With this background of continuous technological change and conflicting expectations as to its business effects, it is a challenging task for business schools to educate future managers. Often, business schools create courses focusing on the new technology. In the 1980s courses focused on Management Information Systems, and later on Personal Computers and their software applications. Electronic commerce was the focus during the late 1990s. Recently we focus on mobile commerce, social networks and big data. These courses are often descriptive at their early days and may lack depth. However, as empirical research of the new technology accumulates, courses become more analytical. Such courses integrate material from a variety of disciplines and strive at giving graduates practical insight on how to manage the new technology. Their downside may be that the insight is not deep and may become less relevant when the technology changes.

A second route, although less popular, is to focus on an academic discipline and to develop its fundamental insights relevant to the new technology. For example, the study of technology from a sociological perspective was taken by several schools including UCD. Or, the study of information from a mathematical modelling perspective as it is done in analytics courses. The benefit in this approach is that the insights are mostly independent of the current technology and they should be relevant to future technologies. The downside is the need to study deeply a discipline that at least for the uninitiated seems irrelevant to the management of information technology.

The current course takes this second route and focuses on Economics. Interestingly, much of the Economics studied at business schools is not relevant to information technology. So, this course presents seminal Economics ideas that may be relevant to information technology and digital markets.

Structure

The first week focuses on online advertising (search, display, social media, SEO, and mobile) information goods (pricing, versioning, and bundling), digital markets (the long tail, network markets and standard wars) and new organizational forms in cyber space (crowdsourcing, open source and platforms and ecosystems). If time allows we will discuss internationalization in cyber space and virtual world marketing.

The second week focuses deeply on foundational concepts of Information Economics, Transaction Cost Economics and Externalities.

Reading Preparation

Students will be asked to read in advance parts of several papers for each of the sessions. The sessions will be a discussion of these papers.

Students must read – Information Rules: A Strategic Guide to the Network Economy by Carl Shapiro and Hal Varian, Harvard Business Press, 1999.

This is the most well known description of Information Technology and Digital Markets from an Economics perspective. It was written by Carl Shapiro and Hal Varian, two University of California, Berkley economists. Both authors are also well known for their non-academic work. Shapiro was the chief economist of the US department of Justice when it sued Microsoft for monopolization; Varian is the chief economist of Google.

The book was written during the dot com bubble years when unprofitable Internet ventures were traded for billions because of the “New Rules” of the digital economy. Shapiro and Varian used this background to present their thinking about the Economics of Information. Their main message was that there are no new rules, but when marginal cost is zero, hold up is common and externalities are the norm, the old rules dictate revised Economic behaviours.

The book has four main lessons: first pricing of information goods must be different because marginal cost is zero. The standard rule in competitive markets of price equals marginal cost is not feasible, as there is no way to recoup the investment in creating the information. Secondly, because information is consumed within systems and following Transaction Cost Economics Shapiro and Varian warn the lock-in or hold-up is the norm with information. So, they discuss how to recognize and manage lock-in, although they accept that consumers of information have not much to do against it. is and their practical implications. Thirdly, they discuss network externalities and the value of standards and compatibility as well as the tactics of standard wars. Finally, they briefly discuss public policy in information markets.

Week 1 (18-20 JUNE): Strategies; Moshe Yonatany

Online advertising:

Most large websites make most of their income from advertising, therefore understanding the basic mechanisms of online advertising is important. We will discuss search engine, display, and mobile advertising, social media marketing (a good example for “earned media”), and SEO (search engine optimization).

Information goods:

Information goods and services have special economic characteristics (e.g., cost structure, lock-ins and switching costs, experience good character) which influence business models and marketing strategy in cyber space. We will discuss these special characteristics and their business implications (e.g., pricing, versioning, and bundling information).

Digital markets:

Markets for information goods have special characteristics, with major implications for businesses. We will discuss the long tail, network markets, standard wars, and tippy markets.

New organizational forms:

“The contribution revolution” has expanded exponentially during the recent decade, as manifested in crowdsourcing sites such as Wikipedia and Facebook, and in open source projects such as the operating systems Android and Ubuntu. We will discuss the phenomena of crowdsourcing and open source software, focusing on understanding motivational factors and relevant business models.

Another interesting form of organizing economic activity is the platform-ecosystem arrangement, which is prevalent in a variety of ICT-enables industries such as game consoles, smart phones, social networks, etc. We will discuss the main roles of platforms and their special relationships with their ecosystem members (i.e. their complementors), on the accepted business models nowadays and on the difference between “product strategy” and “platform strategy”

Additional issues

If time allows we will discuss internationalization in cyber space (do the classic models still hold?) and virtual world marketing (what are the principles of marketing in virtual worlds such as Second Life or online games such as World of Warcraft).

Week 2 (23-25 JULY): Economic Theory; Allen Higgins.

Information Economics –

Economic theory about the role of information in markets has grown dramatically during the last decades. We will review two theoretical ideas about information in economic transactions. We will read parts of Akerlof’s 1970 paper ‘The Market for Lemons’ and discuss adverse selection and market signalling. We will broaden the idea of information in economic transactions by discussing briefly moral hazard and principal agent models. We will read parts of ‘The Adjustment of Stock Prices to New Information’ (Fama et al., 1969) and review the literature about the efficient market hypothesis. We will discuss how these abstract ideas are related to electronic markets such as eBay and to high frequency trading on electronic stock exchanges.

Transaction Cost Economics –

Transaction costs are the costs of participating in a market; they include the costs of searching for data, agreeing on price and quality and if necessary the costs of enforcing the agreement. Information Technology reduces transaction costs and thus much of the revolution in digital markets can be understood in these terms. The goal of this session is to introduce the theory to students by reading parts of Ronald Coase’s 1937 paper ‘The Nature of the Firm’ and Oliver Williamson’s 1975 paper ‘Markets and Hierarchies’.
One of the most spectacular successes of Transaction Cost Economics is the Electronic Markets Hypothesis in which three MIT researchers predicted electronic markets a decade in advance. During this session we will read the original paper and a current critique of the hypothesis: Malone, Yates and Benjamin, The Logic of Electronic Markets, Harvard Business Review, May 1989. A critique with empirical evidence on how much of TCE reasoning has not been corroborated at least for now: E-commerce and the Market Structure of Retail Industries, by Goldmanis, Hortaçsu, Syverson and Emre, Economic Journal, June 2010. As a current example of a Transaction Cost-based prediction we will discuss the book Makers: The New Industrial Revolution (2012) by Chris Anderson.

Externalities –

An externality is the cost or benefit not transmitted through the price of the product and often incurred by a party who is neither a buyer nor a seller. Many information technologies are subject to externalities created by their users. For example, the value of a communication network, a digital market or an operating system is increased as it has more users. The goal of this session is to introduce the basic Economic ideas about externalities. We will read Coase’s 1960 paper ‘The Problem of Social Cost’ which discusses pollution as a negative externality. Then we will discuss Katz and Shapiro’s formulation of network externalities by reading their 1985 paper ‘Network externalities, competition, and compatibility’.

Lecturers

Dr. Moshe Yonatany – Moshe holds a PhD from Copenhagen Business School. He teaches at Tel-Aviv University and in the Ruppin Academic Centre a course about Digital Markets and courses in Strategic Management. His research focuses on the internationalization process of IT-enabled firms and on the role platforms and ecosystems play in such processes.
Video Guest: Dr. Yossi Lichtenstein – Yossi is a lecturer in Technology Management at Norwich Business School, University of East Anglia. Previously, he taught at Israel’s College of Management and at University College Dublin and worked for IBM Research and at HP Labs. He is a co-author of research papers about the economics of software development and of software patents.
Allen Higgins – Allen is a lecturer in Management Information Systems at the UCD School of Business. He is a member of the UCD Centre for Innovation, Technology and Organisation (CITO) and lectures in digital product management, information economics, sourcing, design and creativity

Readings covered under the course

Akerlof_TheMarketForLemons_1970

Coase_TheNatureOfTheFirm_1939

Fama_EfficientCapitalMarkets_1970

KatzShapiro_NetworkExternalitiesCompetitionCompatibility_1985

MaloneEtAl_TheLogicOfElectronicMarkets_1989

Williamson_MarketsAndHierarchies_1973

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