Chapter 23 Technology and E-Commerce

Economic Evolution Economic Survival of the Fittest – must adapt to change or perish Economic Survival of the Fittest – must adapt to change or perish Creative Destruction – technology creates and also destroys Creative Destruction – technology creates and also destroys

Technological Advance New and better goods and ways of producing them New and better goods and ways of producing them –Invention - the discovery of a new product or production process –Innovation Product innovation - new and improved commercial use of products Product innovation - new and improved commercial use of products Process innovation - new and improved commercial use of production methods Process innovation - new and improved commercial use of production methods –Diffusion - copying or imitating an innovation

Research and Development –Research - Invention Basic - general knowledge Basic - general knowledge Applied - answers a specific question Applied - answers a specific question –Development - innovation and diffusion Role of the Entrepreneur Role of the Entrepreneur –Initiator, innovator, risk bearer –Form start-ups

Optimal R & D Interest rate costs (IRC) Interest rate costs (IRC) –Bank loans –Personal Saving –Bonds –Retained earnings –Sell Stock To the Public To the Public Venture Financial Capital - money from savers for high risk start-ups Venture Financial Capital - money from savers for high risk start-ups Expected Rate of Return (ERR) Expected Rate of Return (ERR) Criteria Criteria –ERR > IRC, Pursue –ERR = IRC, Stop

Imitation and Intellectual Property –Imitation Firm's might wait for the first firm to pay for the R&D then enter when the product is a success Firm's might wait for the first firm to pay for the R&D then enter when the product is a success –Intellectual Property Fruits of the human mind Fruits of the human mind –Movies, music and scientific discoveries are protected –Software and computer games aren’t

Benefits of Being First –Attractive buyout offers –Patents - 20 years –Copyrights and trademarks –Brand name recognition to the original –Learning by doing Network effect – value increase the more units are sold Network effect – value increase the more units are sold –Time lags give original the chance to make a economic profit Trade secrets - Coca Cola formula Trade secrets - Coca Cola formula

E-Commerce –Low cost transaction where geography doesn’t matter –Information Products – software, games etc. High fixed costs High fixed costs Low MC Low MC Decreasing SRAS Decreasing SRAS

Today vs the Past Topic The pastE-commerce LocationPhysical building or room None TimeSpecific 9 to 524/7 EmployeesPresentabsent Inventorypresent“just in time”, only when needed Marketgeographically limitedworldwide Sales and product information changing takes time and money instantaneous and free Marketingseller searchconsumer search Costsnormallower advertising, communication and distribution costs PricingMR = MCMR = MC, but MC is lower

Minimum Labor Requirements for E- Commerce Reading, writing and arithmetic Reading, writing and arithmetic Ability to deal with customers Ability to deal with customers Computer skills Computer skills High school diploma High school diploma