The New Economy

Tag: The New Economy

An Apples to Apple Comparison?

Those of you who have been around the economics department the last few years have probably had a brush with Winners, Losers, and Microsoft, where Stan Liebowitz and Steven Margolis examine the antitrust case against Microsoft from the late 1990s.

In today’s New York Times, Paul Krugman makes the case that “Apple’s position in mobile devices now bears a strong resemblance to Microsoft’s former position in operating systems.”  That is, Krugman claims that Apple has considerable market power that is substantially augmented by network “externalities.”*  As a result, Krugman claims that though Apple produces high-quality products…   they are, by most accounts, little if any better than those of rivals, while selling at premium prices.”

University of Toronto’s Joshua Gans provides an interesting response to Krugman, both in terms of the history of the Microsoft-Apple competition, as well as the extent to which Apple products are a contestable market. Indeed, Gans thinks that the extent of Apple’s market power via network effects is constrained:

Krugman in trying to understand the iPhone relies on network effects (people have apps and are locked in) but apps are so cheap it is hard to imagine this is anything remotely the same as that in the past. Krugman also considers Apple high priced but that is very recent. Before the followers came in, Apple’s iPhone was significant precisely because it was so cheap compared to other proposed smart phones. The same is true of the iPad.

Indeed, that gives us the current narrative. Competitors can use price to compete with Apple (which they couldn’t do with the old Microsoft). Apple, therefore, has to keep quality high and consumers satisfied to survive. That is precisely why the share market has such a hard time with it than with say Amazon that arguably relies more on switching costs to keep its customers. The important point is that that is what we want in the tech world. We want competition on the basis of price and quality and we want it to be tough. In many respects, therefore, we have the free from monopoly cost market that we tried to get in the 1990s and should be happy for it.

Continue reading An Apples to Apple Comparison?

Rainy Days and Mondays and 8 a.m. Finals

The big events seem to be steady rain and the onset of finals, so my guess is that you are busy being busy, doing things like studying and writing papers. Or, possibly even taking a break and surfing the internet.  Why else would you be reading this? 

How much is that internet worth to you, anyway?  Probably a lot.  

The Economist surveys the evidence.

See you in the Spring.

Spring Econ Reading Group

The Spring Economics Reading Group will feature the astonishing Winners, Losers, and Microsoft: Competition and Antitrust in High Technology by Stan Liebowitz and Steven Margolis.  The book is more about competition in high technology than it is about Microsoft itself, and it was written back when people still used VHS players and Apple was a bit player in the computer market (pun possibly intended).

Oh, how times have changed.

This book is tried-and-true.  Last year students gave it rave reviews as the featured reading for the Economics Senior Experience, and we also read it in my Industrial Organization this past term.

If you happened to have already read it, don’t despair, I am compiling an auxiliary set of readings to complement (and update) the Liebowitz and Margolis book.  Indeed, the group discussion might be the ideal setting for you to augment your knowledge of the knowledge economy.

We will meet Thursdays from 11:10 to 12:15, provisionally in Briggs 217.    


The Ethics and Economics of “Free” Music

Speaking of things that are “free,” David Lowery, indie rocker and now instructor at the University of Georgia, takes the current generation of music lovers to task for downloading songs on share sites, hence bilking the artists.  Here is his rather extensive post on the subject.

Here’s a taste:

The existential questions that your generation gets to answer are these:

Why do we value the network and hardware that delivers music but not the music itself?

Why are we willing to pay for computers, iPods, smartphones, data plans, and high speed internet access but not the music itself?

Why do we gladly give our money to some of the largest richest corporations in the world but not the companies and individuals who create and sell music?

This is a bit of hyperbole to emphasize the point. But it’s as if:

Networks: Giant mega corporations. Cool! have some money!

Hardware: Giant mega corporations. Cool! have some money!

Artists: 99.9% lower middle class. Screw you, you greedy bastards!

Congratulations, your generation is the first generation in history to rebel by unsticking it to the man and instead sticking it to the weirdo freak musicians!

I am genuinely stunned by this. Since you appear to love first generation Indie Rock, and as a founding member of a first generation Indie Rock band I am now legally obligated to issue this order: kids, lawn, vacate.

Lowery is an interesting guy, that’s for sure. Here is a previous post where he describes his role in Groupon.  And here are some of his musings on his forthcoming (?) book, “Highly Volatile: How Your Lame Band Taught You Everything You Need to Know about Economics and Finance.”

Well, let’s hope it didn’t teach you everything.

For more formal treatment of the economics of file sharing, you might head to the link at Stan Liebowitz’s homepage (of Liebowitz and Margolis fame).

Professor Liebowitz reviews the literature, which generally shows the significant hit file sharing has delivered too the industry. For some careful details, see “File Sharing: Creative Destruction, or Just Plain Destruction?” in the Journal of Law and Economics.

Winners, Losers, and Microsoft Update

Our Senior Readers have forged through Liebowitz and Margolis’s Winners, Losers, and Microsoft, so terms like “increasing returns,” “network effects,” “serial monopoly,” and “lock in” are now rolling off their tongues.  I am very impressed with how the group has embraced the book and how fluid the discussions have been.  I will count this one as a winner.

So, as a follow up,  we have an absolutely remarkable data point from Business Insider (via Mark Perry) that the iPhone is now bigger than Microsoft. (See here for background to the big pies).

Not to Scale, but Still…


The iPhone.

Bigger than Microsoft.

That is remarkable.

More from Business Insider:

Microsoft just plain missed these markets (iPhone and iPad). And Apple created them. And it turns out that, at least for now, they are much more valuable and lucrative markets than the ones Microsoft dominated.

The other mistake Microsoft made, one that ultimately could be far more devastating, is that it became obsessed with the wrong competitor.

For the past decade, Microsoft has obsessively targeted Google as Enemy No. 1, blowing more than $10 billion trying to compete with Google’s amazing search engine.

Plenty to chew on here.

One observation: This does not seem to be Bertrand or Cournot competition, does it?

Streaming Profitability? Less So Than July

Back in July I was telling you about Netflix and its remarkable stock price ascension.  At the time, its price was rising rapidly  with a price flirting with $300, and it was overall looking like a good bet (click on the chart to your right).  If the author was to be believed, it was a great bet.  Indeed, the stock price rose 60 points in the week following that post (did our loyal readers run out and bid the price up?).

So let this be a lesson about getting your stock tips from The Atlantic, things can change pretty fast these days.  Today I pick up my local computer and Netflix shareholders — the ones who haven’t bailed, that is — are bemoaning a stream of remarkable decisions that have kneecapped the company’s stock price, sending it into a free fall back toward $100 per share.

UPDATE: During the time I was writing this post, the stock price opened 40 points lower at about $75.  Wow. Here it is in real time.

Of course, this could be one of those cases where Netflix management is taking the long view instead of grubbing for short-term profits.  The original argument is that there were significant barriers to entry in streaming content, and that seems to be what management still believes — no close substitutes, no potential entrants with the same type of content.

This will likely make its way into both IO and the Senior Read.  A very interesting situation, indeed.

Apple’s Core Competencies?

Jason Kottke has some interesting thoughts on “How to Beat Apple.”  Does this read like a page out of Clayton Christensen’s playbook?

Apple also has some weak spots which a canny competitor should be able to exploit to make compelling products that Apple won’t be able to duplicate or directly compete with.

1. Apple doesn’t do social well on a large scale. Ping? Game Center? Please. Social applications don’t seem to be in Apple’s DNA…

2. Apple can’t do the cloud either…

3. iTunes is getting long in the tooth…

4. I can’t remember if this is my own theory or I read about this on Daring Fireball or something, but the Apple products & services that Apple does well are the ones that Steve Jobs uses (or cares about) and the ones he doesn’t use/care about are less good (or just plain bad).

Might make for an interesting discussion over in one of those innovation classes I hear so much about.