Preface

Luck led us to write this book.

Each of us became economists because we wanted to apply our analytical training to better understand how society functions. By our good fortune, the economics of information, technological change, game theory, and competitive strategy were emerging fields of inquiry when we started our professional careers. We jumped in and offered our own contributions in these areas. Never did we imagine that, twenty years later, we would find ourselves in the middle of an information revolution. What started as an academic exercise, centered on research and publishing, has evolved into speeches, consulting work, expert testimony, government service, and even a deanship.

As we strayed from academia, we often heard complaints that economics was not much use in today’s economy. At first, we were perplexed by these complaints, since they often came from the very same people who sought our advice. Then we solved the puzzle: the complaints were directed at the classical economics most people learned in school, with its emphasis on supply and demand curves and perfectly competitive markets, like markets for agricultural commodities. We had to agree: to an executive rolling out a new software product or introducing the on-line version of a magazine, supply and demand curves just don’t help much. Yet we knew that a sizable body of work in the field of economics speaks directly to current issues in the information economy.

Finally, we realized that our clients and friends were thirsty for knowledge about all manner of topics that we and our colleagues had been writing about for years but were rarely covered in most classes. They wanted to know how to set prices for different customer groups, how to design product lines for information goods, and how to manage their intellectual property. They wanted to know how to protect themselves from lock-in and how to take advantage of it when possible. We discovered great interest in the dynamics of software markets: why does a single company tend to dominate for a time, only to be displaced by a new leader? And we became more and more involved in the application of the antitrust laws to the information economy, with one of us heading off for a stint as the chief economist at the Antitrust Division of the Justice Department. In short, we lucked out: people actually wanted to know and use research results from our chosen fields.

At the same time, we kept hearing that we are living in a “New Economy.” The implication was that a “New Economics” was needed as well, a new set of principles to guide business strategy and public policy. But wait, we said, have you read the literature on differential pricing, bundling, signaling, licensing, lock-in, or network economics? Have you studied the history of the telephone system or the battles between IBM and the Justice Department? Our claim: You don’t need a brand new economics. You just need to see the really cool stuff, the material they didn’t get to when you studied economics. So we wrote this book.

Our goal is to present insights from economics research and from our own experience applying economics in the network economy in a form suitable for the managers and policy makers who have to make strategic choices involving information technology. We believe that the ideas, the concepts, the models, and the way of thinking that we describe here will help you make better decisions. We also believe that our discussion will serve you well for years to come. Even though technology advances breathlessly, the economic principles we rely on are durable. The examples may change, but the ideas will not go out of date.

Of course, we are not saying that we know all the answers. Most of the time business solutions come down to “It depends.” Our aim is to help you figure out what the solution depends on. And the best way to understand such dependencies is to have a framework that relates causes and effects. If you have a clear understanding of what’s going on, and some examples of how other businesses have solved related problems, you will be better placed to make more informed and effective decisions.

Several of our friends and colleagues have contributed valuable suggestions to this book. We especially want to thank Erik Brynjolfsson, Randy Katz, David Messerschmitt, John Miller, Andrew Odlyzko, Sherman Shapiro, Deepak Somaya, Doug Tygar, and Robert Wilensky for their valuable comments.

Finally, we want to thank our wives and children for their patience and good nature throughout this project.