Information Rules

Innovation and Economic Growth and Networks, the Internet, and Cloud Computing

Article Snapshot


Carl Shapiro and Hal R. Varian


Harvard Business School Press, 1998


This books surveys economic and business issues raised by networks such as the Internet.

Policy Relevance

Familiar ideas in economics and business help solve problems that arise with new networks.

Main Points

  • We do not need new economic concepts to understand how new networks affect the economy. One should consider two kinds of economics, the economics of information, and the economics of technology.

  • Information is costly to produce but cheap to reproduce. Business that sell information goods can use appropriate strategies depending on the industry they are in. Businesses succeed with strategies such as differentiating products or by being the first to market.

  • “Versioning” helps businesses learn about their customers by offering them different options and noticing which they choose.

  • Some have argued that copyright law is outdated, but this is not correct. The Internet and new technology networks create new opportunities, but also new problems.
  • o Giving away content for free attracts customers, but other ideas are needed to profit.

  • Customers might hesitate to switch from one product to another because of the cost and difficulty of changing. This is called “lock-in.”
    • Businesses can use lock-in to avoid losing customers.
    • To encourage adoption of their new product, firms can help customers address lock-in.

  • Standards describe how to build technologies so different products work together.
    • Firms must decide whether to cooperate with competitors in working with standards, or to fight a “standards war.”
    • Factors that determine who wins a standards war include intellectual property rights, innovation, and reputation.

  • Competition law and policy are important in shaping networks. Key areas of law include mergers and acquisitions, cooperative standard setting, and monopolization.

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