Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
  • How do you encourage speedier adoption of your product or service?
  • How do you increase the value your product or service creates for your customers?
  • How do you extract more of the value created by your product or service for yourself?

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A recent article in the NYT, “An iPod World, With a Hunger for Electricity” by Jad Mouawad and Kate Galbraith, indicates that US consumers own so many electronic gadgets that the amount of energy they use now constitutes a large and quickly growing portion of total US energy usage. The article goes on to suggest that the only response to this trend is to mandate minimum efficiency standards to decrease the gadgets’ future energy use.

The proliferation of personal computers, iPods, cellphones, game consoles and all the rest amounts to the fastest-growing source of power demand in the world. Americans now have about 25 consumer electronic products in every household, compared with just three in 1980.

Worldwide, consumer electronics now represent 15 percent of household power demand, and that is expected to triple over the next two decades, according to the International Energy Agency, making it more difficult to tackle the greenhouse gas emissions responsible for global warming…

To satisfy the demand from gadgets will require building the equivalent of 560 coal-fired power plants, or 230 nuclear plants, according to the agency. Most energy experts see only one solution: mandatory efficiency rules specifying how much power devices may use…

Mandatory efficiency standards for electronic devices would force manufacturers to redesign their products, or spend money adding components that better control power use. Many manufacturers fight such mandates because they would increase costs, and they also claim the mandates would stifle innovation in a fast-changing industry…

The US market for consumer electronics is largely unregulated. To suggest that that market must be regulated indicates to me that there must be a market failure.

Wikipedia characterizes market failures as “scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point-of-view.” Most market failures arise when one person’s activities impose costs on others that the imposing person does not have to bear. In other words, market failures occur when individuals do not bear the full costs of the actions they take.

The article indicates that consumers buy gadgets that require the use of a lot of energy. Consumers pay for the gadgets at the time of purchase, and they pay for the energy as they use it to run the gadgets. Since people who buy more gadgets and/or use more energy to run their gadgets pay more for the greater amount of electricity they use, the question becomes: what costs are there that people who use more energy impose upon others above and beyond the price the users pay for their energy?

The answer is pollution. Generating more energy to fulfill the desires of gadgets users imposes costs on society in the form of more pollution, which the energy users do not pay for. The article goes on to say that “Most energy experts see only one solution: mandatory efficiency rules specifying how much power devices may use.”

So the issue here is that there are social costs associated with the use of gadgets that the owners of the gadgets do not pay for themselves, but rather, impose on everyone else.

Why stop at pollution?

Once you consider the social costs of pollution, why not also consider the fact that the resources used to produce most energy are depletable. That is, it would be reasonable to assume that the costs of extracting oil and coal in the future will be greater than the costs incurred of extracting those resources today, since most of the easily accessible (cheap) oil and some (much?) of the cheap coal has already been used up. At the same time, it would also be reasonable to assume that once the cheap resources are gone, it will be more costly to generate energy from alternatives to oil and coal, namely sustainable sources of energy. As such, in addition to “taxing” energy used by consumer electronics (by mandating greater energy efficiency of gadgets, which will cause them to be more expensive), why not also add an additional tax to account for the fact that they’re using depletable resources? (Believe it or not, there’s a whole area in economics devoted to the study of depletable resources and how to induce efficient use of them.)

Yet, if they’re going to account for the extra costs gadget users impose on society, shouldn’t they also account for the extra benefits?

The developers and manufacturers of consumer electronic generate benefits for society that are not fully captured in the costs and revenues reflected on financial statements. These benefits are generated through

Employment: The social benefits associated with employing developers and manufacturers of consumer electronics exceed the direct compensation paid to these workers.

Taxes: The taxes paid on income generated by the development, manufacture, and sale of consumer electronics exceed the direct amount of payment, since the collection and processing of these taxes creates jobs.

Standard of Living: The total utility gained by gadget consumers is not fully captured by the price they pay. Rather, there is added consumer surplus, measured by the amount consumers would be willing to pay for the gadgets above the price they must actually pay.

Knowledge: There are knowledge spillovers associated with the development and production of consumer electronics that are captured by society in the form of higher levels of social knowledge, which can be used to develop and manufacturer future products that will benefit society.

There is an additional, potentially perverse benefit associated with the greater depletion of current resources that are used to generate energy to power the excess amount of gadgets used by US consumers. It is possible that the faster depletion of resources will push scientists to more quickly discover new forms of energy that end up being cheaper to produce that the current fossil-fuel-based methods. This would argue for decreasing the price paid for energy used by consumer electronics.

I’m not saying here that gadget users should be free to gobble up huge amounts of energy. Rather, I’m stating that if society is going to force them to be responsible for the added costs they impose on society, then they should be credited with the excess benefits they create as well.

 

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