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Information Goods vs. Industrial Goods: Cost Structure and Competition

  • Roy Jones


    (Simon School of Business, University of Rochester, Rochester, New York 14627)

  • Haim Mendelson


    (Graduate School of Business, Stanford University, Stanford, California 94305)

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    We study markets for information goods and find that they differ significantly from markets for traditional industrial goods. Markets for information goods in which products are vertically differentiated lack the segmentation inherent in markets for industrial goods. As a result, a monopoly will offer only a single product. Competition leads to highly concentrated information-good markets, with the leading firm behaving almost like a monopoly even with free entry and without network effects. We study how the structure of the firms' cost functions drives our results. This paper was accepted by Barrie R. Nault, information systems.

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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 57 (2011)
    Issue (Month): 1 (January)
    Pages: 164-176

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    Handle: RePEc:inm:ormnsc:v:57:y:2011:i:1:p:164-176
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    1. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
    2. Rajiv Dewan & Marshall Freimer & Abraham Seidmann, 2000. "Organizing Distribution Channels for Information Goods on the Internet," Management Science, INFORMS, vol. 46(4), pages 483-495, April.
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    7. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," Review of Economic Studies, Oxford University Press, vol. 49(1), pages 3-13.
    8. Ulrich Lehmann-Grube, 1997. "Strategic Choice of Quality When Quality is Costly: The Persistence of the High-Quality Advantage," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 372-384, Summer.
    9. Jaskold Gabszewicz, Jean & Shaked, Avner & Sutton, John & Thisse, Jacques-Francois, 1986. "Segmenting the market: The monopolist's optimal product mix," Journal of Economic Theory, Elsevier, vol. 39(2), pages 273-289, August.
    10. Arun Sundararajan, 2004. "Nonlinear Pricing of Information Goods," Management Science, INFORMS, vol. 50(12), pages 1660-1673, December.
    11. Hemant K. Bhargava & Vidyanand Choudhary, 2008. "Research Note--When Is Versioning Optimal for Information Goods?," Management Science, INFORMS, vol. 54(5), pages 1029-1035, May.
    12. Nicholas Economides & Fredrick Flyer, 1997. "Compatibility and Market Structure for Network Goods," Working Papers 98-02, New York University, Leonard N. Stern School of Business, Department of Economics.
    13. Choi, Chong Ju & Shin, Hyun Song, 1992. "A Comment on a Model of Vertical Product Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 229-31, June.
    14. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
    15. Deneckere, R. & McAfee, R.P., 1995. "Damaged Goods," Working papers 9508, Wisconsin Madison - Social Systems.
    16. Arun Sundararajan, 2003. "Nonlinear pricing of information goods," Industrial Organization 0307003, EconWPA.
    17. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-31, June.
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