Rules Written by Classically Trained

¶ … Rules

Written by classically trained economists Carl Shapiro and Hal Varian, Information Rules offers readers practical guidelines for understanding and working within the new "network economy." Information Rules: a Strategic Guide to the Network Economy addresses matters of concern to public policy analysts, corporate economists, and educators alike. By applying traditional economics concepts to new economic models, the authors suggest compelling ways of navigating through the nuanced world of information technology. Included in Shapiro and Varian's discussion are broad overviews describing and defining the information economy; business strategies that deal directly with the hardware, software, and online industries; information related to pricing and version upgrades; copyright law, managing lock-in; and other topics pertinent to information technology economics. Comparing newer corporate giants like Microsoft to old world technology bulwarks like Edison, Shapiro and Varian show how economics theories don't need to shift dramatically to account for the quirks of information technologies. In Information Rules, Shapiro and Varian illustrate how, in spite of the enormous changes in the economy, "the basic laws of economics asserted themselves," (Ch. 1 Overview, 1st para.). Therefore, students of economics should be able to grasp the concepts presented in the book without straying too far from traditional economics theories.

Information Rules begins with broad descriptions of the information economy. In spite of enormous advancements in technologies and technological infrastructures, the core principles of economics still push and pull at the market. For example, the authors note that "the old industrial economy was driven by economies of scale; the new information economy is driven by the economics of networks," (Ch. 7 overview, 3rd para.). At the same time, the authors proceed to describe network economy theories and survival strategies that are based on familiar economic principles. Similarly, temporary monopolies have replaced the oligopolies of old and companies now contend with standards wars and technological compatibility instead of inflexible supply and demand curves. However, public policy reflects the same core values and legal principles that have guided technology businesses since Bell.

The authors show the codependent relationship between the software and hardware industries. One of the distinguishing features of the network economy is the interconnectedness of all market sectors. The interconnectivity of market sectors in the new economy neatly reflects the philosophy of interconnection that underlies network systems. In order for organizations to survive within a network economy, corporations must anticipate upcoming technology changes. Both software and hardware manufacturers need to keep abreast of changes that occur in all information technology sectors.

Information is defined by Shapiro and Varian as "anything that can be digitized," (Ch. 1 "Information" para. 1). As opposed to hard commodities, information involves "rather unusual" cost structures (Ch. 1 "Information" para. 2). Therefore, in order to understand the network economy, it is essential to understand core concepts of cost structures related to information. Shapiro and Varian note that information is relatively expensive to produce initially but is relatively cheap to reproduce. Therefore, cost structures must take into account the initial production stage. Ways that organizations deal with pricing include identifying key markets and altering prices based on version upgrades or demand-based services

In Information Rules, Shapiro and Varian discuss intellectual property law and other intangible influences on the network economy in full. On the other hand, the authors do not ignore the importance of tangible products, the technology infrastructures and hardware components. The network economy is unique in that it combines the value inherent in both intangible information and tangible commodities. For example, all digitized data must be sent along cables and through motherboards. The authors offer real-world examples, including the "Wintel" standard extant on the majority of modern-day PCs. The network economy depends on the prosperity of both hardware and software components.

Furthermore, the authors investigate the implications of the network economy on marketing. For example, information technologies allow for highly precise targeted marketing. Corporations that use precise targeted marketing to their advantage are more likely to succeed than those that do not. The authors offer readers some suggestions to maximize the benefits that can be reaped from the technologies themselves: in essence, how to use the information technologies to benefit information technology markets. In addition to direct marketing issues, the authors also discuss concepts like lock-in and switching costs that pertain specifically to information technology. For example, when Microsoft creates a newer version of their Windows operating system, they bank on the willingness of consumers to upgrade or purchase new computers in order to reap the benefits of the new operating system. In spite of relatively high switching costs, the information technology market thrives. However, lock-in remains a key concern for all market segments, both hardware and software suppliers. Shapiro and Varian devote several book chapters to the costs associated with lock-in and switching.

One of the core concepts discussed in Information Rules relates to the positive feedback mechanism that propels the information technology industries: the more popular a technology the more likely consumers are to use it, even if it means upgrading their computer or communications systems. Shapiro and Varian relate the positive feedback mechanism and its ability to make networks blossom to demand-side economics. Standard economical wisdom, including smart marketing mechanisms and penetration pricing, can help the information technology industries thrive. Therefore, market players need not change the rules of economics; they only need to understand the nuances of network economies better.