Varian, Hal

1947–

Economist

Hal Varian is a central theorist of the knowledge economy. He earned a B.S. in economics at the Massachusetts Institute of Technology (MIT), an M.A. in mathematics and a Ph.D. in economics at the University of California–Berkeley (UCB), and has been a professor of economics and finance at MIT and the University of Michigan. He is professor and dean of the School of Information Management and Systems (SIMS) at UCB, and is also a professor in UCB's Haas School of Business and in its department of economics.

Varian's core principle is that “technology changes … economic laws do not.” Based on this simple foundation, Varian has developed a series of insights by applying general economic principles to the specifics of the information economy.

Together with Carl Shapiro, Varian wrote Information Rules: A Strategic Guide to the Network Economy (1999). This book helps working managers to understand and apply the economic theories of the past quarter-century to a world in which information touches every aspect of business. Shapiro and Varian analyze historical and contemporary cases to illuminate today's information environments.

The book sums up Varian's central concerns. An overview of the information economy demonstrates that a new economy does not require new economics; what is needed is a thorough understanding of economics in information and technology, together with a grasp of policy issues.

Information is costly to create. Once information is developed, however, the production cost of each new unit is limited to the cost of the medium itself. In a digital world, producing information is as costly as ever, but reproducing it is nearly free. This determines how information industries should price their products and services. The book shows managers how to use such competitive strategies as product differentiation, cost leadership, and first-mover advantage, as well as how to customize products and pricing.

By applying the principle of customizing products and prices to information, Varian developed a concept he calls “versioning.” Offering a menu of product versions allows a company's customers to segment themselves around products without costly market information.

In the information environment, intellectual property creates new challenges, including decisions on what information to give away and how to charge for the rest. Cheap reproduction and costly production make it imperative to adopt effective strategies to recover sunk costs. The problems of lock-in and switching costs—the costs associated with installing, learning, and adapting to new technology—are also serious issues in an information-technology environment. Sellers and buyers of information products must recognize and manage lock-in and switching costs in order to succeed.

The information economy also involves network effects and positive feedback or increasing returns. Network effects arise when products or services become increasingly valuable to each user in a network as more users use them. This principle is visible in networks of all kinds. For example, railroads become more valuable and useful as rail networks expand and link more users. While this principle predates the information economy, it becomes particularly visible in the kinds of networks shaped by information technology. The telephone systems that reshaped urban society at the beginning of the twentieth century are an example. Shapiro and Varian shape a useful chapter around the strategies that companies can use to exploit network effects to best advantage.

...