The freewheeling economy of the World Wide Web may seem like a lawless place-a frontier town without rules. Not so fast, say economists Carl Shapiro and Hal Varian. While technologies come and go, they argue, the laws of economics persist. As a result, the new moguls of the Web can-and should-learn from the past. Content providers can learn from Hollywood’s mistakes; e-commerce sites can take lessons from L.L. Bean; Bill Gates can discover that hundred-year-old antitrust laws apply even to him.
In their new book, Information Rules (Harvard Business School Press), Shapiro and Varian offer up a practical introduction to the economics of selling information. Shapiro and Varian explain how to maximize the value of intellectual property, differentiate products, lock in customers, negotiate standards alliances, and benefit from so-called “network effects”-the idea that the value of some goods depends on the number of people who use them. Telephones are the classic example of such a product, and in the Web age, network effects seem pervasive. It is network effects that stimulate the positive feedback that allows Microsoft’s market share to grow and grow.
Shapiro and Varian first connected in the mid-1970s when Varian was a professor at MIT and Shapiro an undergraduate. Varian is now dean of the University of California at Berkeley’s School of Information Management and Systems, and Shapiro is Transamerica Professor of Business Strategy at Berkeley’s Haas School of Business. During 1995-96, Shapiro served as chief economist in the Department of Justice’s antitrust division; he has since consulted with the U.S. government on the Microsoft case. Freelance writer Becky Waring caught up with them recently on the Berkeley campus.
TR: Why are network effects so important these days?
Shapiro: Look at Microsoft. Arguably their operating system is not all that great-it’s buggy and it has problems-and yet they still have a 90 percent market share. In time, their position might erode, but they have a lot of inertia due to the size of their installed base of users.