Stephen Laniel’s Unspecified Bunker

I don’t know if it’s really intentional, but Shapiro and Varian make a funny throughout Information Rules. If you’re a company selling an information product, say Shapiro and Varian, you should pay attention to three big aspects of information goods:

• Comparatively easy price discrimination: because you can gather so much more information about your customers than non-Internet businesses typically can, you can get much better estimates of how much your customers are willing to pay. You can then charge them accordingly.
• Lock-in. Once you’ve trained your entire company to use, say, Microsoft Word, the costs of switching to another word processor are prohibitive. Add in the difficulty of converting from the latest Word format to another word processor’s format and the costs are even higher.
• Network externalities. The more people who sign on to Verizon, the more value each Verizon customer gets. Verizon deliberately builds this externality by making in-network calls free to its members.

To some extent these all exist in non-information goods. Airlines guess how much you’re willing to pay based on whether you buy at the last minute; grocery stores know whether you’re price-conscious if you clip coupons. The airlines also furnish a good example of lock-in: they joyously lock themselves into massive many-years-long contracts with, say, Boeing, in order to cut down on the number of brands that their employees have to learn how to repair. As for network externalities, fashion goods are probably a decent example (each pair of Nike shoes almost certainly grows more valuable the more people own them), as is any product where standardization is important: the more of us who use standard-size doors and windows in our houses, the more the companies that make them can exploit economies of scale and produce them more cheaply.

So these economic quirks of information goods have been around for a long time, even if they play a much larger role on the Internet. Shapiro and Varian’s point is that the basic economic logic controlling information goods hasn’t changed much in a long time; the Internet isn’t the end of economics. They apply the three bullets above to a large number of examples, and very specifically lay out how businessmen can exploit these principles to make more money.

Where it gets funny is that one businessman’s loss is another’s gain. Shapiro and Varian tell one group of businessmen how to lock customers into their products, then tell another group how to avoid lock-in, how to extract contractual concessions in exchange for lock-in, etc. They’re not exactly talking out of both sides of their mouth; it’s more like they’re addressing one side of the room, then the other, then back and forth and back and forth until their necks snap.

Two minor critiques:

1. Yes, the economic principles espoused in Information Rules are comparatively long-lasting, but the examples seem a bit dated by now: I stopped being interested in Ashton-Tate and WordPerfect a long time ago. As for Yahoo! and Excite, which Shapiro and Varian also mention, they are not nearly as relevant now as they were in 1998 when this book was written. Varian is Google’s chief economist now, humorously enough. An updated edition of Information Rules that adds some new examples would be helpful. This book almost entirely misses the open-source movement; in 2008 that’s rather glaring.
2. Since this book’s point is to help businessmen develop strategies, it is not a book that can step outside and watch the whole system. It would not be able to tell you, for instance, whether regulations that enforce openness, or government contracting that requires open-source software, is good. It would only be able to tell you, as a businessman, how to react to or preempt that kind of regulation.

It is entirely successful in its aims, though: examine the particular opportunities in the information economy, then very specifically lay out what makes businesses survive or die in that environment.