HW 6 Solution Set
due November 8 (yes, you really have two weeks this time)
Last modified 11/8/99 --PR
Class home page
Recommended: for those interested in understanding the material in chapters
7 and especially 8 in more depth, you might want to peruse a very readable
book that's gotten a lot of attention recently. Information Rules: A
Strategic Guide to the Network Economy, by Carl Shapiro and Hal Varian.
Check the syllabus for the readings for November 8.
(2) E7.10 Suppose there is an industry effort to create a standard user
interface for word processing programs, so that all programs would provide
a common set of features, with the same look and feel (e.g., the menus
for invoking formatting features would be identical). Following the open-closed
principle of interfaces, individual vendors would be free to add features,
so long as they preserved the common way of performing the operations specified
in the standard.
What might motivate Microsoft, Corel, or Red hat to participate in this
process? (If you don't know what these companies do, find out about them
by searching on the Web).
Users might prefer the standard interface, for ease of learning
and companies to please users. There would be one combined "network" to
gain network effects from, possibly increasing the total number of word
Why might they choose not to participate?
It might inhibit innovation. Perhaps more importantly, it reduces
customer lock-in, and thus makes it hard to charge premium prices.
Are the answers to a and b different, based on the companies' current market
share in the word processing or operating systems market?
A company with greater market share in word processing (e.g., Microsoft)
would get less benefit from the larger combined network, and would lose
more from losing the lock-in. A company with less market share would be
less concerned about lock-in and more concerned about having a chance to
lure away its competitors' customers. Market share in the operating systems
market should not make much difference.
(2) E8.3 Concisely answer the following questions:
Does vertical integration make it easier or harder for a company to achieve
Actually, vertical integration of the company doesn't make any difference.
A stovepipe product architecture does make it easier to achieve customer
lock-in, because the customer has to replace the entire integrated product
in order to switch, rather than being able to replace a component at a
Does product diversification make it easier or harder for a company to
achieve customer lock-in?
Diversification can make it a little easier to achieve customer
lock-in. If customers have high coordination costs for shopping from multiple
companies, and hence prefer buying from a single diversified company, those
coordination costs help to lock the customer in to the diversified company.
A customer has to overcome those coordination costs initially in order
to buy from a non-diversified company, and hence is less locked in
Does the presence of a widely used open horizontal interface between two
layers make vertical integration more or less attractive to a company?
A popular, open horizontal interface between two layers make vertical
integration less attractive. A company that sells products at both
layers will need to compete separately in the market for each layer (customers
can buy from the company in one layer's market, and from a competitor in
the other layer), and coordination between the product development teams
is easy with the open interface, so there is little advantage to vertical
The text describes lock-in as resulting from complementary assets. Suppose
that a vendor sells a single product for which there are no complementary
products (though there may be some near substitutes). Is there any way
for a vendor to create consumer lock-in for such a product?
Network effects can create lock-in even in the absence of complementary
products. If a vendor establishes a large customer base, customers may
not want to switch to a competitor's substitute product, because they would
not be using the same product as the other customers.
(2) E8.6 What pricing and versioning strategies would be most advantageous
to the seller for each of the following products or services sold over
the network? Briefly justify your opinion.
Restaurant reviews and recommendations
Frankly, it's hard to see how you'd get consumers to pay directly
for these, even wealthy consumers. You might consider charging the restaurants,
or getting advertising revenue.
A software application for managing investment portfolios
The people with the largest portfolios would probably be willing
to pay more, so you could have a pricing structure that charged more based
on the size of the portfolio.
(2) E8.8 For each of the following, what form of intellectual property
protection would be suitable for preventing appropriation by other suppliers
A new technique, using cryptographic methods, for protecting information
content (e.g., music and videos) from piracy
The name of a new word processing application
The specification of an internal module for an application
Trade secret (you want to keep this functionality encapsulated by
keeping it secret)
A song commemorating the anniversary of the invention of the computer
(2 bonus points if you actually come up with a good alternative; I'm not
expecting that you will) Suppose you have been hired as a political
lobbyist by the American Library Association (ALA). Congress has expressed
a desire to keep so-called harmful-to-minors materials from reaching children
over the Internet and has proposed legislation that includes a requirement
that libraries install software filters on at least some of the public
access terminals in order to receive federal funding. The ALA has taken
a strong position against use of software filters on Internet terminals
in libraries: one of the fundamental values of librarianship has been to
promote access to information, and any content-based restriction on what
patrons access calls that fundamental value into question. Your political
advisors, however, tell you that it's unwise and ineffective to just be
against the legislation, that you need to propose some alternative(s) that
will make Congress and the ALA look good while still preserving the values
that the ALA holds dear. What alternative(s) would you suggest?
This is a tough one that the ALA and civil liberties groups haven't
adequately solved. There are lots of possibilities that would increase
children's positive uses of the Internet and/or reduce their access to
controversial materials, but few of them both give the U.S. Congress a
role and at least arguably fit within the core values of librarianship.
Some of the possiblities include:
Require libraries to have a default startup page for their web browsers
that provides links to a wide variety of materials recommended for children
by the librarians.
Subsidize libraries to run supervised after-school programs that teach
children productive uses of the Internet.
Require libraries to have logins for Internet stations and allow parents
to set filters for their children or specify that the children not be allowed
unsupervised Internet access.
Require libraries to provide an option of filtered access, with each
user beginning an Internet session by deciding whether to have filtered
or unfiltered access. This would leave it up to each child to follow their
parent's wishes or not.
Explanation exercise (2)
Explain the concept of network externalities to someone, and why it is
so important to understanding the evolution of the computer and communications