The New Economy

1
The New Economy Antitrust

• What is the New Economy?
• Economic Factors at Play
• Implications for Competition
• Implications for Antitrust

2
What is the New Economy?

• 1. Computers
• hardware
• software
• 2. Digital Networks
• wired wireless telephones
• cable satellite TV
• networked computers
• networked appliances (autos)
• ATMs

3
What is the New Economy?

• 3. "The Information Superhighway"
• online information
• Cuts distribution costs to near zero
• Major newspapers TV news
• WSJ Online, The Times of London, CNN, MSNBC
• e-commerce
• Information about products prices
• purchases of goods
• Amazon as the new Sears Roebuck
• reversal of the effects of automobiles on Sears

4
Economic Factors at Play

• 1. Nature of Hardware
• physical delivery system for information
• many components
• disk storage (permanent)
• memory (temporary)
• cpu (main processor)
• display (graphics, monitor)
• data bus (transport information between
  functions)
• components must "talk to each other"
• high degree of integration improves performance

5
Economic Factors at Play

• 2. Technical Change in Hardware
• "Moore's Law"
• of transistors on chips doubles every 1.5 years
• Disk writing capabilities
• from 64kb to 64mb to 64gb as relevant units
• Manuf costs approx constant
• Large FC of development rollout of new hardware
• price paths are sharply declining over time for
  each generation of hardware
• depreciation rate for previous generations
  enormous

6
Economic Factors at Play

• 3. Nature of Software
• w/o software, computers don't deliver services to
  consumers
• Types of Software
• Cost Structure of Software
• Network Effects

7
Types of Software

• applications
• MS Word, Excel, Stata (statistical package)
• provide functions that make computers useful
  tools
• operating systems Windows, Linux, Mac
• interface between hardware applications
• allows Excel to operate, store retrieve
  information
• APIs applications program interfaces
• critical links between OS applications
• "tweeners"
• programs that can deliver applications under any
  OS
• browsers run programs written in Java software on
  either Mac, Linux, or windows OS

8
Cost Structure of Software

• Similar to hardware
• high development costs
• Once conceptually designed, software is
  physically a digital image 0101011010
• Difference marginal costs are trivially low
• Costs of reproduction
• fixed costs of machines reproducing image
• storage costs for new copy (end user)

9
Demand Side for Software

• Sharing makes information more valuable
• exchange data
• exchange documents between authors
• send photos, music, etc
• my valuation of these goods increases with others
  ability to make use of them

10
Key Elements in Software

• Network Effects
• my value of a good increases with the number of
  others that use it
• true for phones, fax machines, software
• Economies of Scale
• high FC, low to zero MC
• cost per unit decreases with the of users

11
Implications for Competition

• Conditions lead to "Natural Monopoly"
• tendency for dominance of a single standard
• phones, fax machines
• single or dominant manufacturer
• word processor, spreadsheet
• A single standard or single producer minimizes
  cost and maximizes value
• Forcing competition at the final product stage to
  occur among many firms -- the standard antitrust
  approach -- can be counterproductive

12
Implications for Competition

• Competition exists at the development stage
• "Serial Monopoly"
• contest among software writers to write the best
  software and knock the current monopolist off
  his/her perch

13
Implications for Competition

• Schumpeter's "Creative Destruction"
• competition among innovators rewards the best
  with a new market
• monopoly power is constrained by the availability
  of the next best product

14
Implications for Competition

• Evolution of Word Processors
• Word-Star
• great for secretaries
• depended on hard to learn keystrokes
• Word-Perfect
• easy for dummies like me
• replaced keystrokes with function keys help
  instructions
• MS Word
• MS designed word for Apple's GUI
• WP failed to deliver GUI based product in
  effective timely way for Windows OS

15
Implications for Antitrust

• Can't use the many firms beats single firm model
• Chop off gains from innovation we'll get less
  innovation
• Methods of competition which yield monopoly in
  these markets might be beneficial not
  welfare-reducing