institute of information management, national chiao-tung university et i economics of information...

Institute of Information Management, National Chiao-Tung University

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Economics of Information Economics of Information TechnologyTechnology

Chapter 7 Markets for Information

Student ：周冠州、許滿滿、李安蕙

Date ： 2006/11/30

[ 2 ]Institute of Information Management, National Chiao-Tung University

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Economics of Information TechnologyEconomics of Information Technology

Market for Information

Information and know-how are public goods Public good is a commodity or service 2 reasons to view Information Industries as

Network Industries Buyers can reproduce it at a low cost and sell it

to others through “economic networks” Transmission of information may result in

congestion over the network resulting


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Outline

7.1 Information Reproduction

7.2 The Economics of Libraries

7.3 The Internet

7.4 Pricing Information Goods


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7.1 Information Reproduction 7.1.1 Classification of information reproduction 7.1.2 Copy protection: Digital versus nondigital media 7.1.3 The built-in copy protection of printed media 7.1.4 Captured and uncaptured surplus from copying


7.3 The Internet



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Classification of Information Reproduction

Vertically Reproduced Horizontally Reproduced Mixed Reproduced

0

1

2

η

Provider

0

1 2 3 η

Provider5

0

1

23

Provider

Book Library P2P


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Copy Protection:Digital V.S Nondigital Media

Digital media Nondigital media

Reproduction Identical to originalNot equal to

originals

Number of copies uncertaintyDepend on number

of original purchased

copy protection Easy, cheap Difficult, expensive

Information usageService,

documentationNot required


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The built-in Copy Protection of Printed Media

Pure vertical photocopying is not feasible in printed media

Lower quality of photocopying motivates agents to purchase originals

Info Format 1 2 3 4 5 Total Surplus

Printed $1.00 $0.50 $0.25 $0.13 $0.06 $1.93

Digital $1.00 $1.00 $1.00 $1.00 $1.00 $5.00


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Surplus obtained by individuals from vertical photocopying

PrintedVertically Reproduced

0

1 $1.00

5 $0.06

3 $0.25

4 $0.13

2 $0.50

Total Surplus:

DigitalVertically Reproduced

$1.93 0

1 $1.00

5 $1.00

3 $1.00

4 $1.00

2 $1.00

Total Surplus: $5.00

1

2

η

$1.93


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Calculating Total Surplus from Copying ： Digital

0

1

2

η

Provider

$1.00

$1.00

$1.00

0

1 2 3 η

Provider

$1.00$1.00 $1.00 $1.00


Digital/Printed Horizontally Reproduced

Info Format 1 2 3 ... η Total Surplus

Vertical Info Copying

Printed ρ1 ρ2 ρ3 ... ρη ρ(1-ρη)1-ρ

Digital 1 1 1 ... 1 η

Horizontal Info Copying

Printed ρ ρ ρ ... ρ η×ρDigital 1 1 1 ... 1 η


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Calculating Total Surplus from Copying ： Printed

假設印刷資訊商品售價 $1.00使用者從原著拷貝獲得 ρ 的盈餘 , 0 <ρ< price使用者第一次從拷貝獲得 ρ2的盈餘 , 以此類推 , ρ ＝ price / 2




Digital 1 1 1 ... 1 η


Printed ρ ρ ρ ... ρ η×ρ

Digital 1 1 1 ... 1 η

Total Surplus: $0.93750 1

$0.50

0.5(1-0.54)1-0.5

2$0.25

0.52

3$0.125

0.53

4$0.0625

0.54


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Calculating Total Surplus from Copying ： Printed




Digital 1 1 1 ... 1 η


Printed ρ ρ ρ ... ρ η×ρ

Digital 1 1 1 ... 1 η

Proposition 7.1

Under each vertical or horizontal information reproduction, total surplus enjoyed by the η consumers is higher when information is digital compared with printed information.

Under each vertical or horizontal information reproduction, total surplus enjoyed by the η consumers is higher when information is digital compared with printed information.


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Uncaptured Surplus by Information Providers (1)


0 Provider

2

η

$1.00

$1.00

uncaptured surplus

1 $1.00captured surplus

PrintedVertically Reproduced

0 Provider

2

η

ρ2

ρη

uncaptured surplus

1 ρcaptured surplus

UCD = η － 1

UCD > UCP

ρ(1-ρη)1-ρ

ρ(ρ-ρη)1-ρ

UCP ＝－ ρ ＝

If η=4, UCD =4-1= 3

If η=4, UCP=0.9375-0.5=0.4375


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Uncaptured Surplus by Information Providers (2)

Proposition 7.1

Digital information providers earn proportionally less relative to the potential surplus captured by the providers of printed information.

Despite digital information is priced higher, the amount of uncaptured surplus is higher when information is digital.

The amount of uncaptured consumer surplus when information is digital exceeds the amount of uncaptured surplus when information is printed.

The amount of uncaptured consumer surplus when information is digital exceeds the amount of uncaptured surplus when information is printed.


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7.2 The Economics of Libraries 7.2.1 What is a library ? 7.2.2 How the value of a library is determined 7.2.3 Pricing library services

7.3 The Internet



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What is a library ?

A library as a facility designed for renting information. Libraries can operate for profit or operate as nonprofit

organizations. Libraries must always fund themselves information

renting.0

1

2

η

Provider

Library

21 η…

1

2

η


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How the value of a library is determined

Publishers may earn higher profits when photocopying of originals is allowed (compared with “information is protected”)

Restrictions on photocopying may reduce total welfare Charging the libraries higher subscription rates

Library Users Library

Donors

Publishers

Reasons for funding(Library’s value)

PhotocopyingFacilities

$

$


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Pricing library services(1)

Suppose that

)(book theborrow library to the togoing ofcost sconsumer' the

0)(book theofcontent thereading fromutility basic sconsumer' a

library thefrombook therenting of price the

book theof price the

book theofcost

market in this readers potential

1,2,...,iby indexed libaries,

：：：

：

：：：

ri

b

p

p

0

def

ri

b

p

p

U

If she buys and owns the book

If she borrows (rents) from library i

Does not read the book


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Publisher sells directly to the consumers

Suppose that the publisher does not sell books to libraries. The monopoly maximizes profit by extracting the entire

surplus from consumer by setting

With direct sales, the publisher’s profit level is

p

(7.2) )()( bb p

)book theofcost : market in this readers potential: (


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Publisher sells to η libraries only

Suppose that the monopoly sells one copy to each libraries. With the absence of direct sales, each consumer is willing to

pay a maximum rental price of With η readers and λ libraries, each library i lends to qi=η/λ The maximum price in which the publisher can sell the book t

o library i is

The publisher’s profit is given by )( i

rii qpp

rip

(7.3) )()( ir p


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Comparison of selling vs. renting(1)

Which type of market yields a higher profit to the publisher? The rental market

The market

To compare the profit level in (7.2) with (7.3)

(7.3) )()( ir p

(7.2) )()( bb p

)(

ifbr


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Comparison of selling vs. renting(2)

Proposition 7.3

)(

ifbr

Selling to libraries yields a higher profit to the publisher than selling directly to readers when

1. Readers do not place a high value on owning the book (δ is small ).

2.Books are costly to produce( μ is high ).

3.There fewer libraries relative to the number of the readers( η-λis large ).

Selling to libraries yields a higher profit to the publisher than selling directly to readers when

1. Readers do not place a high value on owning the book (δ is small ).

2.Books are costly to produce( μ is high ).

3.There fewer libraries relative to the number of the readers( η-λis large ).


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Change the number of libraries(1)

Proposition 7.4

An increase in the number of libraries reduces the publisher’s profit.An increase in the number of libraries reduces the publisher’s profit.

1,0,1

)(def

whereqi

(7.3) )()( ir p


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7.3 The Internet 7.3.1 Historical development of the Internet 7.3.2 Pricing Internet services: A calculus analysis 7.3.3 Internet commerce 7.3.4 Taxing Internet commerce



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Historical development of the Internet

ARPAnet was started in 1969 by the U.S. Department of Defense for research into networking.

ARPAnet was opened to nonmilitary users later in the 1970s. In 1972, international connections started.

In 1980s, TCP/IP, DNS, HTTP, WWW…. In 1993, Mosaic was developed in browsers, inclu

ding IE and Netscape.


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Pricing Internet services: A calculus analysis (1)

The internet in not owned by any particular agency or firm.

A user has to connect to an ISP and pay for it first, then he can connect to the Internet. After the connection is made, surfing WWW or sending information is free.

From a social-welfare viewpoint, there is no particular reason for charging consumers for using the Internet unless there is congestion.

Following MacKie-Mason and Vairan ,some analytics of pricing a congestible resource such as the Internet.


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Pricing Internet services: A calculus analysis (2)

Suppose that

Assume that the utility function of each consumer is：

(7.4) 1i

j j

iii

def

i pqQ

qqpq

Q

QqU

network theofcapacity limited the

internet over the nsmittedpacket traper price the

packets of aggregate the

net over the packets

,...,2,1by index users,Internet potential

1

：

：

：

：

：

Q

p

qQQ

q

i

i i

def

ri

capacity) ion to transmissactual of ratio themeans ,congestion ( Q

Q


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Equilibrium usage with no congestion-based pricing (1)

Suppose that Each consumer can transmit and receive any amount of

information over the Internet without having to pay for it. Each consumer takes the network usage by other

consumers,

Yielding first- and second-order conditions for a maximum given by

(7.5) maxQ

qqqU ij ji

iiqi

ij jq

0)(4

1

)(,

2

10

32

2

ii

i

ii

i

qqd

Udand

Qqdq

dU


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Equilibrium usage with no congestion-based pricing (2)

Hence, the individual and aggregate packet transmission levels are

Proposition 7.5

(7.6) 22

22

Q

qQandQ

q ii

Individual usage of the Internet

1. increases with the capacity of the network,

2.decreases with the disutility of delay parameter,

Individual usage of the Internet

1. increases with the capacity of the network,

2.decreases with the disutility of delay parameter, Q

) 4Q

Qcongestion (

2 Q


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Socially optimal congestion-based pricing (1)

We look for socially optimal usage of the network where all consumers use it at the same level. That is

Maximum social welfare which is defined as the sum of consumers’ utility. Thus,

Yielding first- and second-order conditions for a maximum given by

,...,2,1 allfor iqqi

Q

qqW

q

def

max

0)(4)(

,2

032

22

ii

i

qqd

Udand

Qqdq

dW


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Hence, the socially optimal individual and aggregate usage of the net is

Proposition 7.6

(7.7) 22

2

**

2

*

Q

qQandQ

q

When the Internet is provided free of charge, the network is overused by a factor equal to the square of the number of consumers. Formally,

When the Internet is provided free of charge, the network is overused by a factor equal to the square of the number of consumers. Formally, 2

**

Q

Q

q

q


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We wish to find the price per packet which would implement the social optimal level of using the Internet.

Then (7.4) implies that each consumer i chooses qi that solves

The first--order condition yields

(7.8) max iij ji

iiq

pqQ

qqqU

i

*

**

2

2,

2

10

i

i

ii

i

qQ

qQporp

Qqdq

dU


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Substituting (7.7) for yields.*iq (7.9)

)1(*

Qp

1.Social optimal price is zero when there is only one consumer (η =1)

2.Social optimal price increases with η since each user contributes to the congestion of more consumers.

3.This rise in optimal price is even faster when increase since disutility from congestion faster with the number of consumers.

4.The social optimal price also decreases with capacity since a higher capacity level reduces congestion.

1.Social optimal price is zero when there is only one consumer (η =1)

2.Social optimal price increases with η since each user contributes to the congestion of more consumers.

3.This rise in optimal price is even faster when increase since disutility from congestion faster with the number of consumers.

4.The social optimal price also decreases with capacity since a higher capacity level reduces congestion.


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Internet commerce

Instant choice: Competition is just a click away.

Comparison shopping: It’s easy to find a wealth of information on the internet to compare price.

Monopsony power:Corporate buyers to get discounts.

Global reach: The Internet eliminates the geographic protections of local businesses.

The reasons why Internet commerce can shift the balance of commercial power

sellers buyers

Internet Commerce

Commerce Power


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Taxing Internet commerce

The problems faced by tax authorities regarding Internet commerce

The location of the business may differ from the location of the service-manager or operator and the computer-server that handles the commerce.

The location of the server in not easily identifiable. How would the tax authorities enforce the Internet

commercial enterprises to pay overdue taxes? How would tax authorities determine the value

added of an Internet site, Internet servers, and Internet storage devices?


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The problem of taxing Internet services

Information Customer (MN)

Company’s Internet Server (TX)

Data-Storage Devices (MA)

Owner / Operator (CT)

Information flow

Money flow


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Suppose that:the firm earns a profit of $1

MA tax rate 5% 5%

TX tax rate 4% 6%

Declared value added of storage devices (MA) 1¢ 99 ¢

Declared value added of server (TX) 99 ¢ 1 ¢

Declared value added of Internet sites

Proposition 7.61. Firms declare a lower value added in high-tax states.

2. With the introduction of Internet commerce, high-tax states lose more tax revenue than low-tax states.

1. Firms declare a lower value added in high-tax states.

2. With the introduction of Internet commerce, high-tax states lose more tax revenue than low-tax states.


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7.3 The Internet



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Pricing Information Goods

Information release delayno delay higher-costdelaying lower-cost

Quality discriminationfull-scale version higher-costreduced feature lower-cost

Upgrades and new editionsimproved version higher-costoutdated version lower-cost

Renting V.S sellingselling to libraries and to video rental stores.

Bundlingdifferent tastes for different features

Institute of Information Management, National Chiao-Tung University

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Economics of Information Economics of Information TechnologyTechnology

Thank you

for your attention!!


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希臘字母相當於英文字母名稱讀法

A 　 α a alpha

B 　 β b beta

Γ 　 γ g gamma

Δ 　 δ d delta

Ε 　 ε e epsilon

Ζ 　 ζ z zeta 　Η 　 η e eta

Θ 　 θ th theta

Ι 　 ι i iota 　Κ 　 κ k kappa

Λ 　 λ l lambda

Μ 　 μ m mu


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希臘字母相當於英文字母名稱讀法Ν 　 ν n 　 nu

Ξ 　 ξ x 　 xi

Ο 　 ο o 　 omicron

Π 　 π p 　 pi

Ρ 　 ρ r 　 rho

Σ 　 σ s 　 sigma 　Τ 　 τ t 　 tau

Υ 　 υ u 　 upsilon

Φ 　 φ ph 　 phi

Χ 　 χ ch 　 chi

Ψ 　 ψ ps 　 psi

Ω 　 ω o 　 omega


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)(

)()( ir p

)(

)(

)()(

br

br

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