1. Economics Review and New Economy Extension Theory of the firm Pricing  Cost  Demand Structure  Porter’s five forces  Vertical integration  Size of the firm

2. New Economy Economics Micro-economics still works, but for many new economy industries and companies more esoteric models are needed than those presented in the standard “introductory” microeconomics courses The economics of information (and other information like products) is not the same as the economics of “things” The effect of the Internet drastically affects the unit profit structure of industries and companies The Internet provides the opportunity to “unlink” information and things, thus letting the different economics function separately. This leads to potential disintermediation of value added chains This is economic foundation for the effects on industry structure described by Porter in “Strategy and the Internet”

3. Theory of the Firm: Old economy industries P Q Profit MC ATC MR AR AFC

4. Theory of the Firm: Information or Digital Industries P Q MC ATC MR AR AFC Loss AR’’ AR’

5. Strategic imperatives for information or digital businesses First mover advantages Discourage entry by playing tough, and by not being greedy Positive network effects Total Unit Cost declines due to scale effects (fixed cost per unit) rather than to ‘experience effects’ on variable costs Marketing opportunities resulting from detailed information Personalizing the product and prices Knowing the customer (at a highly disaggregate level) allows you to do both Registration, billing, and observation Natural price for undifferentiated information goods is zero

6. Theory of the Firm: New-old Economy firms P Q Profit MC ATC MR AR AFC

7. Effects predicted by Porter Threats of substitutes Bargaining power of suppliers Rivalry Bargaining power of Channels End users Barriers to entry

8. Size and Boundary of the Firm Size is determined by the interaction of factors with positive and negative returns to scale Boundaries are determined by the relative internal and external cost of management and information Boundaries are determined by tradeoffs between the reach and richness of information Good discussion in Tapscott, et al, Digital Capital Revenue Cost

9. Relationship Specific Asset: An investment made to support a given transaction Often necessary to achieve efficiency, but the asset cannot be redeployed to other uses without sacrificing some productivity k measures asset specificity Forms of asset specificity Site, physical asset, dedicated asset, human asset

10. The relationship between asset specificity; agency and technical efficiency; and vertical integration Buy dominates, Use market +$ k0 -$ TT CC AA k*k** Make dominates, Vertical integration  A’ k**