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ITS 4020
Exam 2
89
Other
Undergraduate 4
11/06/2014

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Term
Google algorithms determine ad rank based on:
Definition
quality, format, expected click- through rate, bid
Term
Adwords uses
Definition
second-price auction
Term
Network Game
Definition
apply Nash equilibrium concept to packets on IP network
Term
Braess’s Paradox
Definition
adding network capacity may not result in improved network performance.
Term
Price of anarchy = (Value of Game at Nash Equilibrium/Optimal Value of the Game) ,
Definition
Price of anarchy indicates the social cost of the lack of intervention in a situation
Term
BitTorrent–What is it?
Definition
A network protocol that improves file sharing by simultaneously downloading and uploading files among users in a “swarm.” Free riding is a potential problem.Each node knows list of pieces downloaded by neighbors. Node requests pieces it does not own from neighbors.
Term
BitTorrent employs the “tit-for-tat” strategy to encourage “cooperation” among agents. How?
Definition
Every ten seconds, each peer selects four less cooperating peers it will choke , Will refuse to upload data to these peers for ten seconds, Long enough for TCP to reach full capacity with the new transfers
Term
Why do consumers like technology standardization?
Definition
Differentiated technology products may cause problems for consumers, and deliver lower value than standardized products.
Term
Why do firms like standardization, even if they don’t have a monopoly on the standard?
Definition
Guarantees a larger market, Reduces risk for customers—willing to buy more in a
standardized world., Allows for economies of scale to be exploited, More marketing options, DOCSIS allows for plug and play, marketing by big box electronic retailers and the ability to plug into any cable system, Bottom Line: firms and consumers may get benefits from standardization.
Term
Key issues in a standards race
Definition
a network effect -a hardware/software compatibility issue, and
-a positive feedback loop between the hardware and the software.
Term
Network effects
Definition
The more people who adopt one technology platform make that technology more valuable.
Term
hardware/software compatibility
Definition
The widespread adoption of the hardware will drive the production of more software , Software is “ported” to a specific hardware system, compatibility is an issue
Term
positive feedback loop
Definition
More software makes the hardware more valuable to consumers.
Term
lock-in
Definition
customers may experience costs of switching between standards ,
Term
Laissez faire standardization and efficiency
Definition
Market forces will determine the standard.
Term
QWERTY example. Microsoft?
Definition
The advent of touch typing. Guaranteed the largest market for their skills
Term
Microsoft–a happy accident?
Definition
Mary Gates, Bill’s mother, was on a United Way board with John Opel, chairman of IBM ,
Term
Why did Microsoft become the PC OS standard?
Definition
A strong network effect existed:Learning economies—it is easier to learn one
system, Mobility—ability to sit anywhere and work, File compatibility and sharing, However, this network effect was also linked to a positive feedback loop from independent applications software vendor (ISVs).Consumers recognize the “winning” standard and will join the market for the first time or jump ship from competing standards
Term
Microsoft–extending critical mass. Browser “wars”–why did MS feel threatened?
Definition
A new competitor ‘born’ on the Internet is Netscape. Their browser is dominant, with 70% usage share, allowing them to determine which network extensions will catch on. They are pursuing a multi- platform strategy where they move the key API into the client [browser] to commoditize the underlying operating system.
Term
Microsoft actions toward Netscape and other firms.
Definition
Microsoft withheld APIs from Netscape until October 1995, Microsoft told PC manufacturers—if you take
Microsoft’s OS, the you take Internet Explorer, Bill Gates told Andy Grove, Intel’s CEO, that if Intel continued to develop free platform-level software, that Microsoft would not support Intel’s next generation of processors.
Term
Game theory and standardization–Competitive Tactics for Case 1
Definition
Build an early lead—perceived network size may lead to critical mass and market tipping in your favor-Penetration pricing, Cultivate supply of complements-Cultivate positive feedback loop, Product preannouncements-May freeze demand for rivals products (but may freeze demand for
your own product), Price commitments-Convince market that over time prices will fall, Lower cost producer may be able to make credible promises
Term
Game theory and standardization–Competitive Tactics for Case 2
Definition
Entice other firms to accept your technology standard-Use low-cost licensing to make your technology attractive to others, Accept standards setting body as “enforcer,” develops a hybrid standard
Term
Role of durable investments in complementary products (result in switching costs)
Definition
Switching one component may involve the need switch all other components.
Term
V endor lock-in vs. technology lock-in
Definition
Vendor Lock IN-
Term
Durable purchases
Definition
Lock-in exploitation may relate to
after-purchase supplies, and/or
Maintenance.
Term
Brand-specific training
Definition
Software-Businesses are locked into the Microsoft ecosystem, Wetware and retraining costs can be significant
Term
Information and databases–Cloud lock-in issues
Definition
Cloud services (SaaS, Paas, IaaS) The whole service stack (application, middleware and underlying hardware) is in the cloud–customers are more dependent on a single supplier.
Term
Software as a Service (SaaS)
Definition
the resources that are made available are software application programs, and the environment enables them to be configured and deployed.
Term
Platform as a Service (PaaS)
Definition
the resources are software application platforms, and the environment enables them to be configured and deployed, and enables applications to be created, configured, and deployed upon them.
Term
Infrastructure as a Service (IaaS).
Definition
the resources are virtual processors and data stores, and the environment enables them to be configured and deployed, and enables platforms and applications to be configured and deployed upon them.
Term
Personalized suppliers
Definition
Web development, Advertising, Legal, Accounting firms
Term
Loyalty programs
Definition
Frequent flyer programs, Buyer punch cards, Random free stuff, Amazon.
Term
Contractual commitments.
Definition
Term contracts, Volume discounts, “Requirements contract”—purchase from one supplier, Evergreen contracts that renew automatically: Wireless plan renewals – retention specialists
Term
Intellectual property and lock-in (patents)
Definition
Software design-Preexisting patent problem,
Term
Understanding switching costs
Definition
With no switching cost:Highest price firm can charge user = cost of next
best customer alternative, With switching cost: Highest price firm can charge user = cost of next
best customer alternative + user switching cost, Highest price a firm can charge–next-best alternative + switching costs + search costs - costs of replacing customer
Term
Value of customer base in terms of switching costs (competitive market vs. market with switching costs)
Definition
Assume a “perfectly competitive” market: Many firms selling homogeneous product, Switching suppliers is costless, No lock-in, V.S. Highest price firm can charge user = cost of next best alternative + customer switching cost + customer search costs – cost of replacing customer
Term
Lessons from Lock-in (Buyer
Definition
Anticipate lock-in potential, Potential for higher long-term costs. (Seller will capture “consumer surplus” over time), If possible, utilize multiple sources:However, may be tough in a standardized
environment., Retain detailed information regarding service usage, maintenance requirements, etc:Present detailed information during next negotiation
Term
Lessons from Lock-in (Seller perspectives).
Definition
Anticipate lock-in potential, Promotions and up-front discounts can help build an installed base, Target high-profile/influential customers, Employ loyalty programs:Encourages customers to raise their own switching costs
Term
“Cost-plus” as a mistake (why?).
Definition
Add together the direct material cost, direct labor cost, and overhead costs for a product, and add a markup percentage (to create a profit margin)
Term
Reference prices and positive and negative differentiation values.
Definition
?
Term
Economic value
Definition
?
Term
relative prices
Definition
?
Term
generic pricing strategies.
Definition
Evaluating economic value and relative price can be used to implement “generic” pricing strategies
Term
Skim pricing–what is it?
Definition
Target market willing to pay a premium
Term
Issues with implementation?
Definition
Competitive awareness is needed: easy entry may undermine strategy.
Term
Penetration pricing–what is it?
Definition
Price below economic value to attract and hold a large number of customers.
Term
Issues with implementation?
Definition
Customers should be responsive to price decreases. I.e., new buyers, or existing users willing to switch suppliers, Care must be taken not to undermine image or sales of other products.
Term
Neutral pricing–what is it?
Definition
Price is not used to influence market share:Advertising and marketing
Term
Issues with implementation?
Definition
?
Term
Customer expectations with high-technology products (rapidly declining prices over time)
Definition
?
Term
Dynamic pricing strategies associated with information effects and network effects.
Definition
Product value increases as consumers learn to use, Product value increases as number of users increases, Dynamic pricing response is required.
Term
Price Discrimination and demand elasticity
Definition
Charge different people different prices for the same product or service, Redistributes surplus from buyers to sellersRequirements: Market power (sustain P > MC), Market must be easily segregated by demand elasticity, No resale or arbitrage among buyers, Price discrimination will not work if consumers can resell the good.
Term
The problem with charging one price (for a firm with market power).
Definition
?
Term
Simple demand-based markup rule.
Definition
Marginal Revenue (MR). Change in Total Revenues given a small change in sales, Marginal Cost (MC). Change in Total Costs given a small change
in output, ED = “Own” price elasticity of demand for the firm’s product, Fact #1: Profits are maximized when Marginal Revenue = Marginal Cost.
Term
Requirements for price discrimination–Market power; market can be segmented by demand elasticity; no resale among buyers.
Definition
Requirements: Market power (sustain P > MC), Market must be easily segregated by demand elasticity, No resale or arbitrage among buyers, Price discrimination will not work if consumers can resell the good.
Term
1st Degree Price Discrimination–What is needed for this to work?
Definition
Perfect price discrimination: Each price is exactly equal to the consumer’s reservation price, All surplus goes to seller
Term
Impact of information technology on 1st Degree Price Discrimination
Definition
Transactions costs and information constraints may make this difficult to implement perfectly
Term
2nd Degree Price Discrimination–declining block pricing. Advantages?
Definition
The practice of posting a discrete schedule of declining prices for larger quantities, Reduces information requirements associated with first- degree price discrimination, Consumers self- identify
Term
3rd Degree Price Discrimination–role of observable characteristics and/or self-selection.
Definition
The practice of charging different groups of consumers different prices for the same product, Group must have observable characteristics for third-degree price discrimination to work, Examples include student discounts, senior citizen’s discounts, coupons, rebates, and promotion codes
Term
Conditions for optimal 3rd Degree Price Discrimination
Definition
Profits are maximized when: MR1 = MR2 = MC, ?
Term
Two-part pricing
Definition
Uniform pricing or price discrimination can leave consumer surplus on the table, Two-part pricing charges: A “fixed” entry fee which captures a chunk of consumer surplus, Unit price equal to marginal (or incremental) cost.
Term
Peak-load pricing
Definition
Some resource costs are driven by peak period demand:Wireless and wireline telephone network, Data networks, Electric power  Charge higher prices during peak periods, Charge lower prices during off-peak periods, Promotes efficient resource use, “Peak shifting.” Improves profits
Term
Data caps.
Definition
caps on data associated with Peak-Load
Term
Pricing information
Definition
?
Term
Characteristics of information goods
Definition
Information goods may have a relatively high fixed cost, Information goods may have relatively high “sunk costs.”(Sunk costs are non-recoverable if your information product flops), High fixed and/or sunk costs must be recovered over the number of goods sold, Costs of producing additional copies (marginal costs) are negligible ≅ 0 ,
Term
Suppose that two packets are traveling along the route “A, D, B”. Carefully explain why this cannot be a Nash equilibrium.
Definition
?
Term
What is a virtuous cycle
Definition
Its where the popular product with many compatible users becomes more and more valuable to each user as it attracts ever more users.
Term
What is a vicious cycle
Definition
its a death spiral in which the product loses value as it is abandoned by users, eventually stranding those diehards who hang on the longest, because of the unique preference for the product or their high switching cost.
Term
What is Metcalfe's Law?
Definition
The value of a network goes up as the square of the number of users, meaning that it can be mathematically quanitifed. Formula: n*(n-1) = n^2-n
Term
What is the significance of the QWERTY keyboard layout to collective switching costs?
Definition
In the early days of typewriters, the QWERTY keyboard layout was designed to slow typists down so that the machines wouldn't get jammed. Later on, typewriter design had improved enough that this wasn't an issue, but because everyone already knew how to use QWERTY, more efficient layouts never gained wide acceptance due to both the costs of replacing existing typewriters and retraining typists. This problem still exists today in the computer world, even though the former obstacle is no longer an issue. Collectively, everyone would be better off switching to a more efficient layout, but no one wants to spend time and money on the switching costs related to doing so
Term
The value of connecting to a network, either real or virtual, depends on what economic characteristic?
Definition
The number of people already connected to it
Term
What are the phases of a positive-feedback system?
Definition
There are three phases: launch, takeoff, and saturation. They make up the 3 stages of the S-shaped curve of a positive-feedback system.
Term
What was the name of the first successful spreadsheet introduced in 1979 that was available only on the Apple II?
Definition
Visicalc
Term
What happens when demand-side economies of scale and supply-side economies of scale combine in information technology industries?
Definition
Growth on the demand side both reduces cost on the supply side and makes the product more attractive to other users and accelerates the growth in demand even more resulting in the possibility of industries being created or destroyed more rapidly.
Term
If a market is likely to tip toward a single dominant technology or vendor what may be critical for the market to take off at all?
Definition
Standardization
Term
What is a brand selection point?
Definition
A point in the lock-in cycle when the customer chooses a new brand.
Term
What does it mean when a user faces "lock-in"?
Definition
When a user makes significant investments in complementary assets that are specific to that brand or machine switching costs can sometimes become substantial and lock you into your current system or brand.
Term
How can a customer reduce or eliminate their switching costs?
Definition
Customers can reduce or eliminate their switching costs by renting or leasing equipment when possible, rather than buying it. This allows the customer to reap the advantage of flexibility, while avoiding a lock-in situation.
Term
What is Durable Purchases Lock-In? Give two examples of this type of Lock-in.
Definition
It is a form of Lock-In involving the purchase of follow up products that work with the durable equipment, specific to that supplier, after the initial purchase of that expensive durable equipment. Eamples: Bell Atlantic and their telephone switches, and Computer Associates mainframe computers and operating system.
Term
What is Brand Specific Training Lock-In? Give an example of this type of Lock-In
Definition
It is a form of Lock-In involving the purchase of durable products where personnel are trained to use them. This is often brand-specific, in that considerable additional time and effort would be required to learn to work with a new brand of product with equal proficiency. Example: Software is an example of this type of Lock-In, it can be very time consuming to learn a new piece of software.
Term
What is an example of dual sourcing strategy?
Definition
IBM's selection of two suppliers for microprocessors: Intel and AMD. More recently, Apple has expanded sourcing for iPhone production.
Term
What is a requirements contract?
Definition
Commits the buyer to purchase all of its requirements exculsively from a specific seller for an extended period of time.
Term
What is a Loyalty Program?
Definition
Programs in which customers are rewarded for repeat purchases.
Term
If “1st Degree” or “Perfect” price discrimination is successfully implemented, which of the following outcomes arises?
Definition
b. The seller captures all of the consumers’ surplus.
Term
Standards-setting bodies like IETF or IEEE play this game theoretic role
Definition
a. The "enforcer."
Term
Which of the following is not a reason that technology firms like standards, even if they do not control the standard?
Definition
c. Reduces the pace of innovation
Term
"Wetware" is best characterized as:
Definition
a. Human-specific capital
Term
The "lock-in" problem experienced by Bell Atlantic after it purchased AT&T switches:
Definition
a. AT&T's software development charges.
Term
A seller may increase lock-in for durable purchases by
Definition
b. Staggering the vintages of equipment
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