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Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 1 Economia dellInformazione: Competizione tra sistemi.

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Presentation on theme: "Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 1 Economia dellInformazione: Competizione tra sistemi."— Presentation transcript:

1 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 1 Economia dellInformazione: Competizione tra sistemi

2 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 2 Yesterday Ladozione di un bene di rete implica un beneficio sociale maggiore del beneficio privato, cioè eistono esternalità positive. Esternalità di rete: per il consumatore il valore di un prodotto dipende da quante altre persone fanno parte del network. Le esternalità di rete conducono a rendimenti crescenti da adozione A causa dei rendimenti crescenti da adozione I pirmi momenti di vita di un network sono molto importanti Conseguenze di strategia e marketing

3 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 3 Today Lofferta Il ruolo degli standard Interlinking Industrie monopolisitche (uno standard solo) Industrie oligopoliste (standard diversi in competizione) –Interlinking nel caso di reti fisiche o di telecomunicazioni –Interlinking nel casodi sistemi hardware/software Conseguenze strategiche

4 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 4 Supply side

5 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 5 Chess: the Italian Rules Le regole italiane risalgono alla fine del XV secolo/ metà del XVII quando il centro del mondo scacchistico si spostò dallItalia alla Spagna. Le regole itliane sono diverse da quelle moderne per il passar battaglia e larrocco libero. Le regole itliane rimasero in vigore fino alla fine del XIX secolo si ritiene che fu solo con il Terzo Campionato Nazionale di Scacchi tenutosi a Milano nel 1881 che si imposero definitivamente le regole internazionali. Per tutto il XVII secolo, LItlia non introdusse lo standard europeo e perse la sua centralità nel mondo scacchistico internazionale.

6 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 6 Standard: un sistema di misura (Celsius, inches, two-digit year...) Una particolare misura (sizes of tapes, disks...) the functions that a particular item must perform and the way in which it must perform them (keyboards, spreadsheets, word pr., credit cards) Parametri di input/output (prese) We are interested in de facto standard In molte industri si può ossservare la coesistenza di diversi standard Se coesistono diversi standard diventa importante il problema della compatibilià

7 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 7 Henry Ford: You can have your model T in any color you want as long as its black you can have your VCR of any standard you choose as long as it is VHS you can have your broad range of software applications on any operating systems as long as you choose Microsoft Windows

8 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 8 Interlinking Interlinking: termine genercio per esprimere che due nodi di un network sono interconnessiit is a general term to express the idea that nodes in a network are connected Nelle reti di telecomuniczione linterlinking èInterlinking means interconnection in communication network Nei sistemi hardware/software interlinking significa compatibilità LInterlinking porta sempre vantaggi per I consumatori LInterlinking risolve parzialmente il problema del raggiungimento della a massa critica iniziale

9 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 9 System competitions: compatibility or not? Con compatibilità ci sono delle economie di scala Con compatibilità ci sono esternalità di rete più grandi Senza compatibilità cè più varietà La varietà porta ad aumentare il potere di mercato I consumatori pagano per la varietà Senza compatibilità ci può essere una situazione winner takes it all Che fare?

10 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 10 Compatibility and monopoly

11 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 11 Monopoly with communication network Standard economic theory suggests MR = MC But in network industries it can be useful for the monopolist to sacrifice profits in the short run for at least three reasons: 1.Achievement of critical mass 2.Exploitation of network externalities 3.Exploitation of switching costs

12 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 12 Monopoly in hardware/software systems In normal industry a monopolist wants to be a monopolist Why a vertical integrated monopolist could invite (subsidize) a competitors to enter the market and sell one of the component?

13 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 13 Compatibility and strategic interaction

14 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 14 Incentives of suppliers to interlink The case of an incumbent supplier and a new entrant Incumbent might be reluctant in developing an interlinking…why? Incumbent wants to retain its advantages Incumbent should have the power to keep the entrants out of the market (even if the latter has a superior product)

15 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 15 Incentives of suppliers to interlink The case of two large firms Interlinking decisions depend on the following three issues: Demand increase (why?) Competition increase The nature of competition

16 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 16 Incentives of suppliers to interlink Firms can agree to interlink prior to begin competition It avoids a costly standard battle Competition to win customers more intense Agreement depends on: –There is a firm with a clear superior technology? –Start up problem? –When the shake-out is expected?

17 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 17 Strategic interaction: few famous cases Excess Momentum Excess Inertia The Battle of sex The Little Pesky brother Tweedledum and Tweedledee

18 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 18 Competition and Technical Compatibility Firm 2 Old Technology New Technology (5,5)(2, 2) (1, 4) The fight over compatibility can lead to poor technical choices overall New Technology Firm 1 (6,7) Excess Inertia Two possible problems are Excess Inertia and Excess Momentum Fear of being incompatible can lead to the inferior Nash Equilibrium Neither firm switches because it thinks the other wont switch Watch out: third competitors can be waiting… Both staying the old technology is an Equilibrium Both switching to the new technology is a superior Nash Equilibrium

19 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 19 Competition and Technical Compatibility Firm 2 Old Technology New Technology (6,7)(2, 2) (1, 4) In the case of excess inertia, each firm wants to adopt the same technology as its rival but, fearful that the rival wont switch to the new technology, each wrongly stays with the old New Technology Firm 1 (5,5) Excess Momentum It is also possible that there is Excess Momentum and each wrongly switches to the New Technology Again, fear of being incompatible can lead to the inferior Nash Equilibrium Watch out: market can be not yet mature for new technology (backward compatibility issue) Both staying the old technology is a superior Equilibrium Both switching to the new technology is a Nash Equilibrium

20 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 20 Competition and Technical Compatibility Firm 2 Old Technology New Technology (5,4) (6,5) New Technology Firm 1 (10,7) Battle of the Sexes Firm 1 choosing technology 1 and Firm 2 choosing technology 1 is the Nash Equilibrium preferred by Firm 1 Firm 1 choosing technology 2 and Firm 2 choosing technology 2 is the Nash Equilibrium preferred by firms 2 Assume there are two technologies, Firm 1s technology 1 and Firm 2s technology 2 In Battle of the Sexes firms still agree that there should be a common standard but each wants its own technology to be the standard STRATEGIES: build an early lead by establishing a large installed base; and convince the suppliers of complements to adopt your preferred technology (8,12)

21 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 21 Competition and Technical Compatibility Firm 2 Old Technology New Technology (3,3)(6, 7) (8, 5) New Technology Firm 1 (2,2) Tweedledum and Tweedledee Firm 1 choosing technology 1 and Firm 2 choosing technology 2 is the Nash Equilibrium preferred by Firm 2 Firm 1 choosing technology 2 and Firm 2 choosing technology 1 is the Nash Equilibrium preferred by Firm 1 Again, assume there are two technologies, technology 1 and technology 2, but technology 2 is probably better In Tweedledum and Tweedledee, the firms want to differentiate their products by choosing different strategies but each wants to be the one with the superior technology 2 STRATEGIES similar to before: build a large installed base of the preferred technology with your name on it; and make sure that you have lined up suppliers of complements so that you are the one who gets to adopt that technology

22 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 22 Competition and Technical Compatibility Firm 2 Old Technology New Technology (12,4)(16,2) (15,2) New Technology Firm 1 (10,5) Pesky Little Brother If Firm 2 chooses technology NEW then Firm 1 wants to use technology NEW, as well If Firm 2 chooses technology OLD then Firm 1 wants to adopt technology OLD, too In Pesky Little Brother, Firm 2 is the dominant firm (big brother) that wants to limit competition from Firm 1 (little brother) by adopting a different technology. Firm 1 always wants compatibility There is no Nash Equilibrium (in pure strategies) Firm 2 may frequently change or update its technology to lose its little brother Firm 1 should not be annoying

23 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 23 Systems Competition and Industry Standards The Excess Inertia, Excess Momentum and the Battle of Sexes cases apply to market settings where the network gains from compatibility and connectedness is large: –both firms want to adopt a common technology –Difficulty in agreeing which technology both should use Sometimes firms do not have a preference to make their technology the common standard, but they generally prefer either compatibility or incompatibility –Again the trade-off between increase in demand and in competition –Firm size matters!

24 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 24 Interlinking with hardware/software systems

25 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 25

26 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 26 Case 1: reciprocal compatibility Reciprocal compatibility increases demand… …but it increase competition as well Which effect is going to prevail?

27 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 27 Case 2: asymmetries in compatibility choice with vertical integrated firms There can be the case when one firm wants compatibility, while the other prefers incompatibility; If there is a conflict we expect incompatibility to win (why?); But is incompatibility is that good the best strategy?

28 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 28 Case 3: Compatibility and variety

29 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 29

30 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 30 Compatibility and variety Consider the previous figures Firms A1 and A2 are producing two brands of a good Firms B1,…,Bn produce a complementary good If A1 and A2 do not have compatibility B firms has to develop two versions of the good This means higher fixed costs Higher fixed costs means less variety of B goods What A1 and A2 are going to do?

31 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 31 Strategic variables I Cost reduction gained from compatibility Type of competition Increase in demand Increase/ decrease in variety

32 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 32 Strategic variables II Losses from reduced monopolistic power Your relative technological position Your relative size Your reputation

33 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 33 Personal Computers The rise and decline of IBM PC The role of misjudgements "I think there is a world market for maybe 5 computers." [Tom Watson, Founder of IBM] Microsoft vs. Apple Unbundling of software and hardware Pricing strategies

34 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 34 North vs. South in Railroad gauges Different widths of rail tracks (gauges) –North standard (smaller) vs. South standard Railroad gauges standardization faced 3 obstacles: –Costly –Each group wanted the others to make the move –There where workers gaining from this incompatibility How standardization was achieved (1890)? –Institutional factors

35 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 35 Lessons from this case study Incompatibilities arise by accident and can persist for many years Network markets tend to tip towards the leading standard Seceding from the standard-setting process can leave you in a a weak market position A large buyer can have crucial influence Those left with less popular technology should develop an adapter or write off assets and join the bandwagon

36 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 36 RCA vs. CBS (Color television) In 1941, RCA leader of B/W sets CBS was developing a color tv system but… FCC adopted CBS as standard RCA fighted: –Sell as many B/W sets as possible –Criticize CBC to slow adoption –Strong R&D efforts Historical events: Korean war

37 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 37 1953 RCA won the war: RCA technology was the standard (back-ward compatible) but… …by 1963 only 3% of TV households had colour set: a $130 million investment showed no profit What was wrong?

38 Copyright SDA Bocconi 2005 Competing Technologies, Network Externalities …n 38 Lessons Adoption of a new technology can be slow if price/performance ratio is unattractive First mover advantage need not to be decisive Victory in a standard war often requires building an alliance A dominant position in one generation of technology does not necessarily translate into dominance in the next generation


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