Information Complements, Substitutes, and Strategic Product Design

Competitive maneuvering in the information economy has raised a pressing question: how can firms raise profits by giving away products for free? This paper provides a possible answer and articulates a strategy space for information product design. Free strategic complements can raise a firm's own profits while free strategic substitutes can lower profits for competitors. We introduce a formal model of cross-market externalities based in textbook economics -- a mix of Katz & Shapiro network effects, price discrimination, and product differention -- that leads to novel strategies such as an eagerness to enter into Bertrand price competition. This combination helps to explain many recent firm strategies such as those of Microsoft, Netscape (AOL), Sun, Adobe, and ID. We also introduce the concept of a ''content-creator'' who adds value for end-consumers but may not be paid directly. Similar to the case of product dumping, this research implies that both firms and policy makers need to consider complex market interactions to grasp information product design and profit maximization. The model presented here argues for three simple and intuitive results. First, a firm can rationally invest in a product it intends to give away into perpetuity even in the absence of competition. The reason is that increased demand in a complementary goods market more than covers the cost of investment in the free goods market. Second, we identify distinct markets for content-providers and end-consumers and show that either can be a candidate for the free good. The decision on which market to charge rests on the relative elasticities as governed by their network externality effects. If the externality effect is sufficiently great, the market with the higher elasticity is the market to subsidize with the free good. It is also possible to charge both markets but to keep one price artificially low. Importantly, the modeling contribution is distinct from tying in the sense that consumers need never purchase both goods -- unlike razors and blades, the products are stand-alone goods. It also differs from multi-market price discrimination in the sense that the firm may extract no consumer surplus from one of the two market segments, implying that this market would have previously gone un-served. Third, a firm can use strategic product design to penetrate a market that becomes competitive post-entry. The threat of entry is credible even in cases where it never recovers its sunk costs directly. The model therefore helps to explain several interesting market behaviors such as free goods, upgrade paths, split versioning, and strategic information substitutes.http://deepblue.lib.umich.edu/bitstream/2027.42/39683/3/wp299.pd

Information Complements, Substitutes, and Strategic Product Design

Competitive maneuvering in the information economy has raised a pressing question: how can firms raise profits by giving away products for free? This paper provides a possible answer and articulates a strategy space for information product design. Free strategic complements can raise a firm's own profits while free strategic substitutes can lower profits for competitors. We introduce a formal model of cross-market externalities based in textbook economics -- a mix of Katz & Shapiro network effects, price discrimination, and product differention -- that leads to novel strategies such as an eagerness to enter into Bertrand price competition. This combination helps to explain many recent firm strategies such as those of Microsoft, Netscape (AOL), Sun, Adobe, and ID. We also introduce the concept of a ''content-creator'' who adds value for end-consumers but may not be paid directly. Similar to the case of product dumping, this research implies that both firms and policy makers need to consider complex market interactions to grasp information product design and profit maximization. The model presented here argues for three simple and intuitive results. First, a firm can rationally invest in a product it intends to give away into perpetuity even in the absence of competition. The reason is that increased demand in a complementary goods market more than covers the cost of investment in the free goods market. Second, we identify distinct markets for content-providers and end-consumers and show that either can be a candidate for the free good. The decision on which market to charge rests on the relative elasticities as governed by their network externality effects. If the externality effect is sufficiently great, the market with the higher elasticity is the market to subsidize with the free good. It is also possible to charge both markets but to keep one price artificially low. Importantly, the modeling contribution is distinct from tying in the sense that consumers need never purchase both goods -- unlike razors and blades, the products are stand-alone goods. It also differs from multi-market price discrimination in the sense that the firm may extract no consumer surplus from one of the two market segments, implying that this market would have previously gone un-served. Third, a firm can use strategic product design to penetrate a market that becomes competitive post-entry. The threat of entry is credible even in cases where it never recovers its sunk costs directly. The model therefore helps to explain several interesting market behaviors such as free goods, upgrade paths, split versioning, and strategic information substitutes.

Technology Supply Chains: An Introductory Essay

This working paper was originally printed in the Working Paper Series of the MIT International Motor Vehicle Progra

Technology Suuply Chains: An Introductory Essay

This essay addresses strategic technology sourcing -- the determination of what technologies are strategic to a firm (or nation) and the management of the policy options that follow from this determination. This work is certainly not the first word on this subject, nor will it be the last. In fact, we hope that it will stimulate significant discussion about strategic technology sourcing especially in those organizations where such discussion has been absent, naive, or just shouted down by the manage-by-the-numbers types. In the business press today, outsourcing is the rage. "Restructure and downsize your organization; outsource as many functions as possible" seems to be the message from many of the world's most profitable corporations -- large and small -- as well as their consultant-armies.MIT: Leaders for Manufacturing, the International Motor Vehicle Program, the Industrial Performance Center, the International Center for Research on the Management of Technology, and the Japan Program; Chrysler; Intel; Sematech; and Texas Instruments

Unbalanced and Minimal Point Equivalent Estimation Second-Order Split-Plot Designs

Restricting the randomization of hard-to-change factors in industrial experiments is often performed by employing a split-plot design structure. From an economic perspective, these designs minimize the experimental cost by reducing the number of resets of the hard-to- change factors. In this paper, unbalanced designs are considered for cases where the subplots are relatively expensive and the experimental apparatus accommodates an unequal number of runs per whole-plot. We provide construction methods for unbalanced second-order split- plot designs that possess the equivalence estimation optimality property, providing best linear unbiased estimates of the parameters; independent of the variance components. Unbalanced versions of the central composite and Box-Behnken designs are developed. For cases where the subplot cost approaches the whole-plot cost, minimal point designs are proposed and illustrated with a split-plot Notz design

Dinner at Your Doorstep: Service Innovation via the Gig Economy on Food Delivery Platforms

Boosted by greater demand for convenience and then turbocharged by the coronavirus disease 2019 pandemic, online food delivery (OFD) has witnessed rapid growth over the past several years. Despite such growth, however, it is still unclear how incentives and payoffs of various parties are affected by the three-sidedness of the OFD market, which involves consumers, restaurants, and gig drivers—beyond the traditional two-sided setting. In this paper, we study the OFD platforms’ optimal choices in a competitive setting where the platforms compete on both prices and service quality. Our analysis shows that conventional insights from two-sided platforms do not completely carry over to OFD markets. Specifically, we find that the three-sidedness may either soften or intensify the price competition in the buyer-seller market, consequently altering the subsidizing conditions of OFD platforms. Although two-sided platforms generally get hurt by network effects because of the pressure to induce participation, OFD platforms are able to mitigate such negative impact by flexibly adjusting their service strategies. Yet, OFD platforms may not always be better off by introducing gig labor because additional leverage for competing platforms could lead to a prisoner’s dilemma situation. We show further how the platforms’ pricing and service strategies critically depend on the strength of network effects. With the rising of the gig economy, the question of employment status for gig workers has become an increasingly controversial issue in the United States and elsewhere. We address this by showing that the introduction of minimum wage regulation, although benefiting the gig drivers, may be welfare diminishing to society at large. Our results can thus provide guidance to policy makers seeking a compromise between the interests of gig workers and society as a whole

Classes of Split-Plot Response Surface Designs for Equivalent Estimation

When planning an experimental investigation, we are frequently faced with factors that are difficult or time consuming to manipulate, thereby making complete randomization impractical. A split-plot structure differentiates between the experimental units associated with these hard-to-change factors and others that are relatively easy-to-change and provides an efficient strategy that integrates the restrictions imposed by the experimental apparatus. Several industrial and scientific examples are presented to illustrate design considerations encountered in the restricted randomization context. In this paper, we propose classes of split-plot response designs that provide an intuitive and natural extension from the completely randomized context. For these designs, the ordinary least squares estimates of the model are equivalent to the generalized least squares estimates. This property provides best linear unbiased estimators and simplifies model estimation. The design conditions that allow for equivalent estimation are presented enabling design construction strategies to transform completely randomized Box-Behnken, equiradial, and small composite designs into a split-plot structure

Nanopore direct RNA sequencing maps the complexity of Arabidopsis mRNA processing and m6A modification

Understanding genome organization and gene regulation requires insight into RNA transcription, processing and modification. We adapted nanopore direct RNA sequencing to examine RNA from a wild-type accession of the model plant Arabidopsis thaliana and a mutant defective in mRNA methylation (m6A). Here we show that m6A can be mapped in full-length mRNAs transcriptome-wide and reveal the combinatorial diversity of cap-associated transcription start sites, splicing events, poly(A) site choice and poly(A) tail length. Loss of m6A from 3’ untranslated regions is associated with decreased relative transcript abundance and defective RNA 30 end formation. A functional consequence of disrupted m6A is a lengthening of the circadian period. We conclude that nanopore direct RNA sequencing can reveal the complexity of mRNA processing and modification in full-length single molecule reads. These findings can refine Arabidopsis genome annotation. Further, applying this approach to less well-studied species could transform our understanding of what their genomes encode