Information Rules: A Strategic Guide to the Network Economy

Authors: Carl Shapiro and Hal Varian

Information is a Commodity

A large portion of Shapiro and Varian’s volume Information Rules is a Cliff Notes version of the basic principles of E-business that we have covered in class to date. Several chapters focus on core concepts discussed during the first E-business I lecture, (i.e. Recognizing & Managing Lock-In, Networks, Positive Feedback, Cooperation and Compatibility, etc.). Given that I had already spent time on these concepts, I found that I gained the most ‘fundamental insight’ from subjects covered in the book that I had not studied before reading Information Rules. The core concept that was enlightening for me was the complexities and possibilities of the product for which the Internet serves as the main channel: information.

As an undergraduate student I spent a summer working as an intern at a newspaper. There I learned the value of the upper right corner ad space, the importance of a catchy headline to drive vending machine sales, and the need to proof everything (at least twice!) that went out the door. What I never spent very much time considering was that most of the information in the newspaper was a commodity. When you got right down to it, any enterprising citizen could gather all of this information through alternative channels: TV, neighbors, radio,etc.. In the end, Shapiro and Varian have really made me think about the fact that the value of that newspaper was not in the news it provided. Information Rules states,” The price of commodity information is pushed to zero because of competition. Information is costly to produce, but cheap to reproduce.” The Internet creates a duplication and distribution cost for information of practically zero. Therefore, if I am in an information business (i.e. the stock market, databases, software, etc.), I am selling a commodity that can have a standalone retail value of zero no matter how much I spent to gather that information.

How do you sell Information?

Shapiro and Varian contend that information businesses can exist in three market structures: a dominant firm (a la Lock-in), differentiated product, or cost leadership. Lock-in has been discussed in previous classes. We can focus on product differentiation and cost leadership in a stock market example. Stock transactions can be carried out electronically. Stock research and advice can be sent out to millions of people for free via the Internet as soon as any one person has obtained it. Therefore, we see retail brokers following one of two paths: product differentiation with advice galore or cost leadership with $5.95 on-line trades (Shapiro and Varian would say this will eventually be free). Cost leadership was covered quite handily in Operations class last year. I think the main bang for your buck in Information Rules are the learning points laid out around pricing and differentiating an information product. Please see the Chart A below for my main takeaways on pricing and selling an information product.

Why should Darden students care?

Shapiro and Varian’s list of ‘information businesses’ is a long list and includes many of the jobs and careers that Darden students will be considering after graduation. How will we get paid if we are designing, selling, building, marketing, etc. a product that has a value of zero? At the level of Pavlovian self-interest it is worthwhile to explore what the ongoing value proposition will be for information businesses in the future.

Chart A
Technique	Application	Benefits
Personalized Pricing	Create a Chinese restaurant menu where consumers pick each item at a discrete level. (i.e. Dell computers or empty airline seat auctions )	Avoids bundling of unwanted features and allows perfect price discrimination.
Versioning	Create a product line that allows for different price points through varying features that are important to different audiences (i.e. delay, user interface, convenience, speed of operation, flexibility of use, comprehensiveness, image resolution, etc.). For efficiency of production, consider ‘value-subtracted versions’; build to a higher spec and subtract features at each declining price point.	Avoids bundling of unwanted features and allows perfect price discrimination without infrastructure required to support personalized pricing.
Group Pricing	Create different prices for different identifiable groups based on key group characteristics (i.e. price sensitivity, usage of information, support requirements, etc.).	Creates network effects through site and organizational licenses and momentum towards lock-in (i.e. student discounts to ‘get’em while they are young’).