By David S. Isenberg
From America's Network, January 1,2000
If you want to understand the boundary between monopolistic behavior and aggressive competition, or if you need a concise review of how standards shape business strategy (and vice versa), then you should read Information Rules by Carl Shapiro and Hal R. Varian (Harvard Business School Press, Boston, 1999).
If you need to understand the phenomenon of lock-in, or why competition in networks so often trends toward winner-take-all, or how Microsoft fends off attackers like Netscape, reading Information Rules will help, too. Economists Shapiro and Varian have crafted a useful book that "is based on durable economic principles [and seeks] models, not trends; concepts, not vocabulary; analysis not analogies." (Page 18)
But theres something hinky about Information Rules. Maybe it is the authors complete absence of humor "If all else fails, sue. No, really." (Page 288)
FCC commissioner Harold Furchtgott-Roth, an economist himself, tells a joke about two economists who go tiger hunting: one shoots right, the other shoots left, and an intact snarling tiger leaps out of the jungle right in front of the hunters. The two overjoyed economists celebrate, "We got it!"
Maybe it is that the authors barely acknowledge and never confront the limits of their so-called durable economic principles. Hunters kill tigers, might be a durable principle, but in the above joke theres much, much more going on.
The authors approach to versioning is illustrative. They present several cases in which businesses bring different versions of a virtually identical product to market at different prices according to different customers willingness to pay costs as much to distribute the fancy version as the plain version. In many cases, in fact, production of the low-quality version incurs additional costs, since it is often a degraded form of the high-quality version." (Page 63)
The authors call this process "value-subtracted." They all but say, See how little you can sell to those ignorant suckers and how much you can get them to pay. They ignore that ever-so-durable version of economics in which the customer gets honestly valuable goods for radically reduced prices. Theyre light on explaining key processes of the networked economy, such as economic growth and positive elasticity. To them, its a zero, zero, zero-sum world.
Shapiro and Varian seem unimpressed by the special moment in which we live, in which unprecedented abundances of computational power and information transmission and storage amplify human reach by cascading factors of ten, seemingly overnight. Nor do they appreciate that these improvements reduce costs so radically that they enable entirely new ways of doing business.
They do discuss how advertising and the collection of demographic information support free e-mail and online news. But there is no perspective on how advertising has shaped media so far, nor is there any treatment of the privacy issues raised by online personal-data-driven advertising.
Furthermore, there is little appreciation of the kind of versioning that first builds a relationship based on "free" which, once established, motivates people to buy the book or record, subscribe to the publication, or attend the conference or concert. Nor do the authors acknowledge that customers and suppliers that enter into such relationships tend to hire each other, invest in each other and solve each others problems.
This love affair between customer and supplier, based on pleasing each other in ways that supercede money, has been part of small business for longer than money has existed. Now it can evolve online so that larger businesses can relate to more people in more ways. The authors miss this point so completely that they discuss the Amazon.com associates program as if it were a customer loyalty program like airline miles or Green Stamps. The Amazon associates program is not about customer loyalty it allows book enthusiasts (customers or not) to become sales agents, extending Amazons reach in a way that would be impossible without information technology.
I admit to pushing the envelope of the authors intent, which is to show how incumbent, mainstream economic thinking translates to the information age. Nevertheless, Shapiro and Varian are simply wrong to assert that "Technology changes. Economic laws do not." (Pages 12) The appearance of money itself changed economic laws. So did double-entry bookkeeping. Today, sophisticated data-driven modeling is adding new dimensions of understanding perhaps, even, control to economics. Economic laws, like the laws of every living science, do indeed change.
David Isenberg can be reached at www.isen.com.
Copyright 1999 Advanstar Communications.