Economia dell’Informazione:
Competizione tra sistemi
Copyright SDA Bocconi 2005
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Yesterday
•
L’adozione 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
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Today
• L’offerta
• 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
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Supply side
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Chess: the Italian Rules
Le regole italiane risalgono alla fine del XV secolo/ metà del XVII quando il
centro del mondo scacchistico si spostò dall’Italia alla Spagna.
Le regole itliane sono diverse da quelle moderne per il “passar battaglia” e
l’arrocco 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, L’Itlia non introdusse lo standard europeo e perse la sua
centralità nel mondo scacchistico internazionale.
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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
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compatibilià
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Henry Ford: “You can have your model T in any
color you want as long as it’s 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”
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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 l’interlinking èInterlinking means
interconnection in communication network
• Nei sistemi hardware/software interlinking significa compatibilità
• L’Interlinking porta sempre vantaggi per I consumatori
• L’Interlinking risolve parzialmente il problema del raggiungimento della a
massa critica iniziale
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System competitions: compatibility or not?
• Con compatibilità ci sono delle economie di scala
• Con compatibilità ci sono esternalità di rete più grandi
• Senza compatibilità c’è 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?
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Compatibility and monopoly
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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
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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?
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Compatibility and strategic interaction
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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)
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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
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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?
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Strategic interaction: few famous cases
• Excess Momentum
• Excess Inertia
• The Battle of sex
• The Little Pesky brother
• Tweedledum and Tweedledee
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• Fear of being incompatible can lead to the inferior
Competition
and Technical Compatibility
Nash Equilibrium
• fight
Neither
switches because
the other won’t
The
overfirm
compatibility
can leadittothinks
poor technical
choices
overall
switch
Two possible problems are Excess Inertia and Excess
Momentum
• Watch out: third competitors can be waiting…
Firm 1
Excess Inertia
Old
Technology
Both Firm
staying2
New
the old technology
Technology
is an
Equilibrium
Copyright SDA Bocconi 2005
Old
Technology
New
Technology
(5,5)
(2, 2)
(1, 4)
(6,7)
Both switching to
the new
technology is a
superior Nash
Equilibrium
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Again, fear of being incompatible can lead to the
Competition
Technical Compatibility
inferior Nashand
Equilibrium
In the case of excess inertia, each firm wants to adopt the
same technology as its rival but, fearful that the rival won’t
switch
to the
new
technology,
each
wrongly
stays with
Watch
out:
market
can be
not
yet mature
forthe
new
old
technology (backward compatibility issue)
It is also possible that there is Excess Momentum and each
wrongly switches to the New Technology
Firm 1
Excess Momentum
Old
Both staying Technology
Firm 2
the old technology New
is a superior Technology
Equilibrium
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Old
Technology
New
Technology
(6,7)
(2, 2)
(1, 4)
(5,5)
Both switching to
the new
technology is a
Nash
Equilibrium
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Competition and Technical Compatibility
STRATEGIES:
Assume there
are two
technologies,
Firm
1’s technology
1 and
build
an
early
lead
by
establishing
a
large
Firm 2’s technology 2
installed base; and convince the suppliers of
In Battle
of the Sexestofirms
stillyour
agreepreferred
that there should
be a
complements
adopt
technology
common standard but each wants its own technology to be the
standard
Battle of the Sexes
Old
Firm 1 choosing Technology
Firm 2
technology 1 and
New
Firm 2 choosing Technology
technology 1 is the
Nash Equilibrium
SDA Bocconi 2005
preferredCopyright
by Firm
1
Firm 1 choosing
Firm 1
technology 2 and
Firm 2 choosing
Old
New
Technology
Technology technology 2 is the
Nash Equilibrium
preferred by firms 2
(8,12)
(5,4)
(6,5)
(10,7)
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Competition and Technical Compatibility
similar technology
to before:1 and
Again, assumeSTRATEGIES
there are two technologies,
technology
2,installed
but technology
2 ispreferred
probablytechnology
better with your name
build a large
base of the
it; and make and
sureTweedledee,
that you havethe
lined
up want
suppliers
of complements
InonTweedledum
firms
to differentiate
their
products
strategies
but each wants to be
so that
you areby
thechoosing
one who different
gets to adopt
that technology
the one with the superior technology 2
Tweedledum and
Tweedledee
Old
Firm 1 choosing Technology
Firm 2
technology 1 and
New
Firm 2 choosing Technology
technology 2 is the
Nash Equilibrium
Copyright SDA Bocconi 2005
preferred
by Firm 2
Firm 1 choosing
Firm 1
technology 2 and
Firm 2 choosing
Old
New
Technology
Technology technology 1 is the
Nash Equilibrium
preferred by Firm 1
(3,3)
(8, 5)
(6, 7)
(2,2)
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There is no Nash Equilibrium (in pure strategies)
Competition and Technical Compatibility
Firm 2 may frequently change or update its technology to
In Pesky Little Brother, Firm 2 is the dominant firm (big
lose its “little brother”
brother) that wants to limit competition from Firm 1 (little
brother) by adopting a different technology. Firm 1 always
Firm
1 should not be annoying
wants
compatibility
Pesky Little Brother
Old
Technology
If
Firm
chooses
Firm 22
technology NEW New
then
Firm 1 wants Technology
to use
technology NEW, as well
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If Firm 2 chooses
Firm 1
technology OLD
Old
New
then Firm 1
Technology
Technology
wants to adopt
technology OLD,
(12,4)
(16,2) too
(15,2)
(10,5)
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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!
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Interlinking with hardware/software systems
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Case 1: reciprocal compatibility
• Reciprocal compatibility increases demand…
• …but it increase competition as well
Which effect is going to prevail?
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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?
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Case 3: Compatibility and variety
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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?
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Strategic variables I
• Cost reduction gained from compatibility
• Type of competition
• Increase in demand
• Increase/ decrease in variety
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Strategic variables II
• Losses from reduced monopolistic power
• Your relative technological position
• Your relative size
• Your reputation
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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
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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
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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
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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
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• 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?
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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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