Information Rules: A Strategic Guide to the Network Economy

by Carl Shapiro, Hal R. Varian

In Information Rules, authors Shapiro and Varian reveal that many classic economic concepts can provide the insight and understanding necessary to succeed in the information age. They argue that if managers seriously want to develop effective strategies for competing in the new economy, they must understand the fundamental economics of information technology. Whether information takes the form of software code or recorded music, is published in a book or magazine, or even posted on a website, managers must know how to evaluate the consequences of pricing, protecting, and planning new versions of information products, services, and systems. The first book to distill the economics of information and networks into practical business strategies, Information Rules is a guide to the winning moves that can help business leaders navigate successfully through the tough decisions of the information economy.

Genres: Business, Economics, Nonfiction, Technology, Management, Internet, Finance

442 pages, Kindle Edition

First published January 1, 1998

Reviews

[Raphael Leiteritz · Rating 5 out of 5]

This book changed my life. A bit old now but basically enabled the whole internet economy.

[Arif · Rating 4 out of 5]

The most important resource is not currently derived from natural resources or capital again, but it is in knowledge. (Drucker 1993). Economic information or digital economy no longer relies on fixed assets, but on the intangible assets such as knowledge and information. The rapid development of information technology has provided a fundamental change in business structure and economy. This book outlines some important issues related to the information economy: for pricing information goods (pricing information), differentiation of products for various customers (versioning information), management ownership (rights management), recognition of the lock in and management (recognizing and managing lock in), network effects and positive feedback (positive feedback and network), cooperation and compatibility (cooperation and compatibility), competition in the standardization of information products (waging a standards war), and policies related to the information sector ( information policy)

[Oliver · Rating 4 out of 5]

I don't understand why there hasn't been a second edition of this book! It's great, but its usefulness can only go so far due to the fact that it came out in 1999. I would love to see an updated edition.

[Asher · Rating 5 out of 5]

A hell of a read.

The whole premise of the book is that it can’t go out of date. It’s right.

These are economic principles that apply to any information good.

Sure, the examples are from 1999. They illustrate the ideas well. Highly recommend.

[Lino Matteo · Rating 4 out of 5]

The insights in this book are still excellent almost 20 years after it was written.

The examples are a little dated - but like a time machine to the tech past

Well laid out with very good additional readings

Additional thoughts:

Information Rules: A Strategic Guide to the Network Economy
• Carl Shapiro
• Hal R. Varian
• Copyright 1999


In Information Rules, authors Shapiro and Varian reveal that many classic economic concepts can provide the insight and understanding necessary to succeed in the information age. They argue that if managers seriously want to develop effective strategies for competing in the new economy, they must understand the fundamental economics of information technology. Whether information takes the form of software code or recorded music, is published in a book or magazine, or even posted on a website, managers must know how to evaluate the consequences of pricing, protecting, and planning new versions of information products, services, and systems. The first book to distill the economics of information and networks into practical business strategies, Information Rules is a guide to the winning moves that can help business leaders navigate successfully through the tough decisions of the information economy.
https://hbr.org/product/information-r...
Information Rules: A Strategic Guide to the Network Economy

Information Goods -- from movies and music to software code and stock quotes - have supplanted industrial goods as the key drivers of world markets. Confronted by this New Economy, many instinctively react by searching for a corresponding New Economics to guide their business decisions. Executives charged with rolling out cutting-edge software products or on-line versions of their magazines are tempted to abandon the classic lessons of economics, and rely instead on an ever changing roster of trends, buzzwords, and analogies that promise to guide strategy in the information age. Not so fast, say authors Carl Shapiro and Hal R. Varian. In "Information Rules" they warn managers, "Ignore basic economic principles at your own risk. Technology changes. Economic laws do not." Understanding these laws and their relevance to information goods is critical when fashioning today's successful competitive strategies. Information Rules introduces and explains the economic concepts needed to navigate the evolving network economy. "Information Rules" will help business leaders and policy makers - from executives in the entertainment, publishing, hardware, and software industries to lawyers, finance professionals, and writers -- make intelligent decisions about their information assets.
https://books.google.ca/books/about/I...


This boo should have been required reading during the Dot.com era and is still full of useful insights. Some of the examples are a bit dated but nostalgia aside, still appear valid.
Notes:
3. Information is costly to produce but cheep to reproduce.
4. Price information according to its value not its cost
10. Focus not just on your competitors but also on your collaborators and complementors.
14: Network effects lead to demand side economies of scale and positive feedback
18: How we differ: We seek models, not trends; concepts, not vocabulary; and analysis not analogies. We firmly believe the models, the concepts and the analysis will provide you with a deeper understanding of the fundamental forces at work…
21: Information is costly to produce but cheap to reproduce
25: Differentiate your produce
28: Reduce average cost by increasing volume through reuse and resale
40: Personalize pricing
53: Chapter 3: Versioning Information
56: Information is like an oyster it has its greatest value when fresh
• Not if you practice ‘harvesting strategy’ which keeps it fresh and growing and you can continually – but appropriately – harvest fruit
72: If you can’t decide how many versions to have, choose three
76: Use bundling to introduce new products to consumers
112: The total cost of switching = costs the customer nears + costs the new supplier bears
123: Keep control of information and databases by using standardized formats and interfaces
129: Loyalty programs will proliferate
138: Bargain hard during initial negotiations, emphasizing your influence as a customer
144: Recognize that your locked-in customers are valuable assets
146: Revenue from your locked-in customers is the return on the investment you have made in them
153: Offer discounts to influential buyers
157: Offer value-added information services to deepen your relationship with your customers
161: Sell products that are complementary to your installed product base
175: The notion of positive feedback is crucial to understanding the economics of information technology
177: Positive feedback is a more potent force in the network economy than ever before
• Social media has made this even more significant
• 80/20 (PFactor) has become 96/4 or 98/2
184: Metcalfe’s law: The value of a network goes up as the square of the number of users
Therefore: m * (n-1) = n^2 – n
If the value of a network to a single use is $1, then a network the size of 10 has a total value of $100
Value of a network of 100 is worth $10,000
244: Try to shift the risk of failure to a large customer or, even better, the government
258: To compete effectively in network markets, you need allies
259: Find your natural allies…
270: Key assets in network markets:
1. Control over an installed base of customers
2. Intellectual property rights
3. Ability to innovate
4. First mover advantage
5. Manufacturing abilities
6. Strength in complements
7. Reputation and brand name
Don’t forget that customers as well as technology suppliers can control key assets too.
280: Once you’ve sold to everyone, you need improvements to drive upgrade sales
286: If you fall behind, target a market niche or interconnect with the larger network

[MK_bighead · Rating 4 out of 5]

Many examples used in this book are like distance memories - or rather not memory for me. However, the lessons are still applicable in today’s context. There are a lot of new developments in economics theory regarding networks, multi-sided markets and information technology, but the foundation remains unchanged. This book does a good job in explaining these foundations clearly in plain words. I might enjoy it more if I am a businesswoman, which seems to be the target reader, but there is still a lot of fun reading it.

[Giorgos · Rating 3 out of 5]

Not bad but I think the social media have changed a bit the information flow or rather disrupt it and this book may be a bit outdated....but I may be wrong

[Brunella Longo · Rating 5 out of 5]

I reviewed this book in 1999 for an Italian Journal that to the best of my knowledge does not exist anymore ("Scienza & Business", 1 (1999), n. 3-4, p. 106). That journal, as far as I can remember in 2024 so forgive me and let me know if I am wrong, was designed in the academic circles of Rome Sapienza University.
At the time there was great excitement at international level for the "network economy" that we now commonly call the "digital economy": perhaps this second term highlights the fact that the business and the academic communities preferred to shield the interlocking nature of contemporary capitalism societies emphasised by the first term and yet it is the exploitation of the network dimension that has been so crucial to the internet and media developments that followed.
This book remains a fundamental one: it helped me understand the internet market in the context of the media and publishing sectors that made space to it historically and foresee the (still existing) huge gaps in terms of economic policies, governance and data rules. Perhaps the digital economy has evolved in the direction of even more unscrupulous profiting from network externalities since then, with an utterly absence of regulation and the rise of cybercrime but it is also true there are undoubtedly today infinite more positive and interesting case histories to mention, trends and business models to consider, particularly if we look into the non profit sector with so many social enterprises existing only in the virtual world.
All in all I still consider this book quite a defining reading for everybody working or aspiring to work in the creative industries and cultural heritage sector.

Here is the text of my 1999 book review, in Italian:

Nel 1994 Hal R. Varian pubblicava il sito Economics of the Internet, presso il server Gopher dell’Università del Michigan. Il sito era uno dei pochi luoghi dove cominciare a comprendere, grazie agli scritti dell’autore, quali sarebbero stati gli effetti economici della diffusione di internet, a quali leggi fosse opportuno prestare attenzione, come considerare le esternalità di rete nella dilagante crescita mondiale del Web.
A cinque anni di distanza, pochi libri sulla Nuova Economia possono vantare la chiarezza espositiva e la ricchezza di esempi della “Guida strategica” di Varian e Shapiro.
I due economisti, entrambi provenienti dal MIT ed oggi docenti alla School of Information Management and Systems dell’Università di Berkeley, si propongono di offrire una condensata e piana esposizione dei principi che regolano il mercato dell’informazione, intesa in senso lato.
Nell’economia digitale, infatti, la definizione di prodotto o servizio informativo comprende, secondo gli autori, “i risultati delle partite di calcio così come libri, banche dati, periodici, film, musica, listini azionari ed ogni sorta di pagina Web”.
Il lettore che fosse convinto di trovarsi davanti alla esposizione di “nuove” leggi per comprendere la “nuova economia” resterebbe deluso già dalle prime righe della prefazione: se si considerano la storia della telefonia degli ultimi 100 anni e le battaglie antitrust nel settore informatico degli ultimi 40, sostengono Varian e Shapiro, non c’è alcun bisogno di “nuove” leggi quanto piuttosto di conoscere le ricerche compiute nel campo dell’economia applicata alle tecnologie dell’informazione negli ultimi dieci anni e che sono rimaste fuori dagli studi della maggior parte di coloro che oggi si trovano a vario titolo implicati nei nuovi affari digitali.
Dunque, Inforules, già dal titolo, promette di arricchire lo studente, il ricercatore, il neoimprenditore o l’attento professional del settore ITC, di documentate certezze su come funzionano le cose nella network economy.
Nessuna concessione, in tutto il testo, a quei concetti che affollano la maggior parte dei saggi simili a questo - quali comunità virtuali, portali, free-economy ecc. ecc. - e che lasciano spesso una sensazione di... leggera olistica vacuità.
Le tecnologie cambiano continuamente, dicono Varian e Shapiro, ma le leggi economiche no. Quindi, via allo studio o al ripasso delle lezioni di base.
I temi trattati coprendono la determinazione delle politiche di prezzo basate sul valore dell’informazione piu’ che sui costi di produzione, la gestione della proprieta’ intellettuale svincolata dalla protezione tout court ma piuttosto orientata alla domanda, la valorizzazione del quadro d’uso (l’esperienza) dell’informazione, i problemi derivanti dalla sovrabbondanza dell’offerta (information overload), le tecniche e tattiche di versioning dei prodotti digitali, i condizionamenti che la struttura della industria del software impone alla distribuzione dell’informazione digitale e le strategie per prevenire i costi di adeguamento tecnologico, il ruolo degli standards aperti e altro ancora di primario interesse. Numerosi e variegati gli esempi ed i casi a cui gli autori ricorrono per illustrare i concetti, non solo dal mondo dei media e dell’ICT.
Il capitolo “Pricing Information” analizza nel dettaglio il caso della battaglia tra l’Enciclopedia Britannica e l’Enciclopedia Encarta di Microsoft, ci mette in guardia dal pericolo di trasformare il prodotto informazione in una commodity - cosa che sta puntualmente avvenendo in numerosi segmenti dell’on line - e suggerisce come prevenire questo drammatico fenomeno puntando sulla personalizzazione e l’organizzazione dei contenuti e sulla creazione di “experience goods”.
Nel capitolo “Versioning information” - il cui testo e’ stato anticipato nel 1998 da “Harvard Business Review” - si fa riferimento tra l’altro al tema della diversificazione tra edizioni on line e off line e si illustrano con esempi le tecniche di “bundling” (l’offerta di “pacchetti”, applicabile nell’editoria come nel software). Il tema della proprietà intellettuale viene sviluppato, con pratici e utili riferimenti alle strategie di versioning, nel capitolo successivo.
Nei capitoli “Recognizing Lock-In” e “Managing Lock-In” l’attenzione si sposta su come riconoscere, prevenire e gestire i casi di “lock-in” ovvero tutte quelle frequenti situazioni in cui l’impresa (media o software) vede i suoi assets bloccati in un formato destinato ad una rapida obsolescenza e deve rapidamente convertirli in un nuovo formato. Chi ha interessi prevalentemente nel mondo dei media, troverà in questi capitoli parecchie risposte ai problemi “classici” (come e quando adottare nuovi format, come non cannibalizzare mercati esistenti adottando nuove tecnologie).
Il capitolo “Networks and Positive Feedback” introduce alcuni concetti fondamentali tra cui quello dei monopoli temporanei o a termine (che nell’economia digitale prevalgono rispetto agli oligopoli dell’era industriale) e quello delle esternalità di rete o della legge di Metcalfe. Su queste e altre “inforules” di base gli autori non risparmiano definizioni e commenti, sia pure in forma sintetica, che riescono a rendere interessanti o curiose anche per i lettori più esperti. Ad esempio raccontano che Metcalfe ha in verità confidato loro di non ritenersi l’autore di questa legge e che la paternità gli fu attibuita da George Gilder.
Le possibili strategie per l’ingresso ed il successo nei mercati dominati dalle tecnologie vengono dettagliatamente trattate nei capitoli Cooperation and Compatibility e Waging a Standards War. L’esposizione è corredata da indicazioni sulle conseguenze ed i requisiti a livello di dimensioni di impresa e da esempi tratti dalla storia di importanti innovazioni di questo secolo (telefono, tv a colori). Nel descrivere i casi, gli autori si soffermano sulle tattiche efficaci per stimolare un feedback positivo, concetto chiave di questa parte del libro (si intende il processo dinamico in base al quale si determinano rendimenti crescenti ovvero... “the strong get stronger”!).
Un ultimo capitolo, “Information Policy”, mette in guardia chi - neo-imprenditore travolto dalla liberalizzazione delle telecomunicazioni o manager stordito dal successo dello start-up nel settore internet - fosse tentato di trascurare il ruolo della economia politica nella nuova economia.
Il peso della regolamentazione, dei governi, delle associazioni di consumatori e delle autorità antitrust aumenterà, prevedono i due economisti. Probabile che le valutazioni in questo ambito siano soprattutto di Shapiro, che ha alle spalle una grande esperienza di consulente per l’Antitrust USA.
Dal punto di vista di chi consideri il mercato dell’informazione digitale nella sua dimensione di “sistema” - come tra l’altro i due autori suggeriscono di fare - l’unico limite di questo libro è... proprio il suo punto di forza: concentrando l’attenzione sulle leggi che governano l’economia dell’informazione, la Strategic Guide di Varian e Shapiro trascura le “altre” dimensioni - politica, culturale, linguistica, sociale, cognitiva e creativa - facendovi cenno esclusivamente a proposito dei costi di produzione.
Come si creano i prodotti e i servizi che possono determinare feedback positivi o come si selezionano le informazioni e le tecnologie che possono avere valore per i consumatori o ancora come si aggregano contenuti per dare luogo a esperienze di valore on line? In una “guida strategica alla nuova economia” ci sarebbe piaciuto trovare qualche ipotesi di risposta anche a queste domande... di non scarsa rilevanza strategica, ma i tempi non sono ancora maturi perchè la materia possa essere affrontata con un approccio interdisciplinare.
Il libro contiene indicazioni bibliografiche per ulteriori approfondimenti e, soprattutto, ha un ricco sito Web all’indirizzo www.inforules.com, dove si possono trovare linkati il testo del primo capitolo, presentazioni in formato Power Point di tutti i capitoli, le aziende ed i riferimenti bibliografici citati nel volume ed i siti personali dei due autori, per chi volesse accedere ad ulteriori approfondimenti.
(10 settembre 1999)

[Ted · Rating 3 out of 5]

This book has some great high-level knowledge (if, as others have mentioned, it's full of examples that are *very* dated -- but I don't know what the authors could have done to prevent that, aside from rewriting the whole book twenty years later.) That said, I *would* be keen to see a brief refresh of this book, given the massive changes that have taken place in the internet economy since this was published in the 90's.

Where this book got me down though, is I was hoping for an overview of high-level concepts around the internet economy (about which the authors have published many academic studies.) About 1/3 of the book contains this, and it's great, but this deep, broad-ranging knowledge is sprinkled throughout chapters that contain *highly* specific, detailed information that's likely only valuable for people in/near the C-suite of large IT companies. And even that information seems well-distilled and valuable, don't get me wrong! But I struggled to skim through the highly-detailed tech/MBA/"you're VP of product at Microsoft and are considering an acquisition of a rival startup, what do you do?"-type info to find the gems of information about broad-reaching changes to economics and culture that *were* in the book, and were great, but just in a much lesser concentration than I'd hoped.

[Eric Stevens · Rating 3 out of 5]

Standard supply and demand models aren't as relevant to IT as other industries because of the often intangible nature of IT solutions, discriminatory pricing, high network effects and lock in. This book applies the fundamentals of economic theory in a practical manner that is specific to the Information Technology industry.

While being useful as a strategy guide for varies common economic situation for IT business managers, it is also enlightening as a customer as to power held by large orginizations.

[Enzo Nicolini · Rating 5 out of 5]

Muy buen análisis de las implicancias de las tecnologías de la información en la economía y la administración, sin artilugios marketeros y con rigor académico.
Lo único cuestionable se este libro es por qué no tiene una segunda edición con sus referencias tecnológicas actualizadas. Los más de 20 años desde su publicación se notan.

[Volodymyr Melnyk · Rating 5 out of 5]

This is a great book, in spite of the year, it was first published. It is still up-to-date for those who wish to launch its digital product and get acquainted with versioning and differential pricing, setting standards, lock-ins of customers or lock-ins by suppliers, legal aspects of the antitrust challenge by customers or competitors, etc.

[Von_feng · Rating 4 out of 5]

It's an old book, but the lessons are not. Just as the authors said,"Technology changes. Economic law do not."The book provides us with the models, the concepts, and the analysis to gain a deeper understanding of the fundamental forces at work in high-tech industries and network(information) economy.

[Craig Delaune · Rating 5 out of 5]

Basic Economic Principles for the Information Age

Read this book if you are interested in the AI revolution and what to look for in businesses that will thrive (or flounder) in this new economy. This book teaches that regardless of the technology being sold, the businesses doing the selling will go on to be judged by basic, tried and true economic principles. Great book.

[Mark · Rating 5 out of 5]

Excellent microeconomic foundation for looking at internet-based companieseven after all these years.Unsurprising given the reputations of the authors and the fact that one of them, Hal Varian, put his analysis into practice as Google's head economist.

[Carter · Rating 3 out of 5]

An older book, but it highlights some important differences historically, about the software business, from many years ago, compared with the present day. It is interesting, to analyse or think about how this situation has evolved, over time.

[Dominik · Rating 5 out of 5]

A classic. Despite the dated references, the content and lessons of this book are timeless.

[Kirill Sukhonosenko · Rating 5 out of 5]

Great reading

Topics
- differential pricing
- zero marginal cost economy
- lock in
- role of standards
- policy making
- network externalities and positive feedback

[Amanda · Rating 4 out of 5]

I read this book at Tepper and remember it being impactful and valuable. It had a lot of chapters about how to sell and provides good strategy on tech products.

[Maarten · Rating 5 out of 5]

I had the honor to meet Carl Shapiro in 2000 at Berkeley and zero marginal cost, and network effects are the two takeaways from this very important book.

[Ben · Rating 5 out of 5]

This book still informs decisions I'm making at work, 15 years after I read it.

[Gaetan BELBEOC'H · Rating 5 out of 5]

Important read, to understand many of the principles at play on the internet.

[Basil Latif · Rating 3 out of 5]

This is a marketing strategy book for high tech firms. Some of the theories and examples have not aged well in the 20 years since the book was written which indicates that the principles laid out in this book are not timeless laws but rather temporary observations. Only benefit I got from reading this was I learned of some of the ways businesses keep consumers “locked in.” Not a huge fan of it otherwise.

[Mohammad Hossein Kamali Nezhad · Rating 5 out of 5]

Despite a long time from the first edition of this book, many new issues have been covered in this book.

[Corry · Rating 5 out of 5]

This book was written when the internet was barely 5 years old. Yet almost everything in this book is still relevant today in thinking about tech strategy. Honestly, it’s an incredible feat

[Van · Rating 2 out of 5]

Taught a simple lesson of network effect.

[Rex · Rating 4 out of 5]

Technology changes frequently, economic laws does not.

The authors express their view on information economy from information, technology, and policy aspects.

Information has a unique cost structure and therefore it requires strategic management of intellectual property. Information is also an "experienced" good and its value varies to different buyers and at different times. In the information age, information is abundant but attention is limited. These characteristics influences the technology trend and marketing strategies.

Technology that carries the information serves the purpose of lock-in. Therefore we see system competition at various levels. Managing lock-in is sophisticated and the authors have given detailed examples in the book. Although not unique to information economy, network externalities is a prominent effect. Various strategies leveraging standards are also explained which I find very interesting since this links to all the previous characteristics of information economy.

Lastly, policies cannot be ignored by any big information players. When market "fails", regulation and policies will have legitimate interventions.

[Marks54 · Rating 4 out of 5]

This is still the best introduction to the economics of the Internet and businesses that use the Internet. It is written by two of the top economists anywhere -- Varian has written one of the top texts on micro economic theory and is not the chief economist for Google. This is a clear and really insightful trade book that is much more informative and most economic and business texts. It is supported by a terrific web site (The Information Economy) and there are supporting materials available for this book, in case you want the more detailed versions of their argument.

[Deniss Ojastu · Rating 5 out of 5]

An excellent overview of the economic laws and good-case business practices in the information industry. Helps to understand, for example, why Microsoft or Google has achieved dominance in their respective market, why young consumers don't want to pay for films or music anymore or why the keyboard we are using is like it is.

Due to its date of publication (1999), several examples are somewhat outdated. Discussion about U.S. Governmental policies is a little deductive and not so interesting.

Otherwise, a great book for anyone doing business in information technology.

[Johnny Galt · Rating 4 out of 5]

Great book on nuts and bolts of business and economics in relation to the internet and computers. This book is a bit dated and much has changed since thie time this book comments on but for the most part it is so thorough in laying groundwork it is informative to read even now. There is potentially no book like it on the subject of computers and economics.