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?



  • A recent NYT article, ‘Why Japan’s Cellphones Haven’t Gone Global” by Hiroko Tabuchi, presents a dichotomy in the Japanese cellphone market: while the technology is extremely advanced, the market has evolved in such a way as to effectively isolate the Japanese market from the rest of the world. This will become increasingly problematic for Japanese suppliers (of both hardware and software/content/services), since the Japanese market is shrinking.

  • What Is Game Theory?

    Game theory is a tool that’s used to “map out” particular situations and figure out what is likely to happen under various scenarios.

    In some cases game theory is employed by means of modeling situations using mathematical equations. In these cases, the equations can be used either to solve for optimal solutions and/or to generate simulations to see how the situation plays out under different scenarios.

    However, game theory can also be employed using less rigorous methods. Most situations can be mapped out visually and textually, and then one can use those mappings to better understand situations and draw conclusions.


    When Can Game Theory Be Used?

    Game theory can be used in situations in which an entity’s payoff (profits, well-being, etc.) is dependent upon actions taken by other entities.

    As the world has become globalized and markets have accordingly become more interconnected and complex, game theory has become increasingly applicable to more and more situations. In particular, more situations have become characterized by global ecosystems, in which many players from different countries are involved to different extents and at different levels.

  • Merriam-Webster defines membership as “the state of belonging to or being a part of a group or an organization.”

    Being a (voluntary) member of a group generally confers both benefits and costs upon group members. The benefits and costs of group membership change over time, (i) as the environment – political, economic, social – changes, and (ii) as the composition of and dynamics between members of the group change. And as the benefits and costs change, existing members may be led to exit the group, while new members may be incentivized to join.

    This analysis examines:

    • The benefits and costs of being a member of a group,
    • The different types of groups, and
    • Group dynamics as the environment and group membership change.

    Figure 1


  • A recent article in the NYT, “Sites to Refuel Electric Cars Gain a Big Dose of Funds” by Nelson D. Schwartz,described the latest development in the evolution of the market for electric cars:

    Better Place, the closely watched start-up that hopes to create vast networks of charge spots to power electric cars, is set to receive a vote of confidence on Monday, in the form of $350 million in new venture capital.  Although Better Place will most likely require billions more in financing, this investment is an important step for the company...

  • The US is a services-based economy, and US consumers demand good customer service. Customers have increasingly been using social media to publicize incidences of bad customer service, and many customers use online reviews to determine which businesses to patronize. All of this suggests that companies providing bad customer service should be forced either to improve or to go out of business. Yet, in many cases, lousy customer service has been able to persist without causing businesses significant financial harm. How can this be?

    You see this situation, for example, in cases of:

    • Airplane flight delays or cancellations or lost luggage;
    • Utility service continuity or billing problems;
    • Retailer exchanges or returns; and
    • Food Services ordering problems or problems with quality of food or service.

    This analysis examines the Customer Service Game and seeks to understand how businesses can continue to profit despite having chronic customer service problems.

  • Follow Apple’s Lead?

    Establish an Online Presence?

    Product Differentiation

    Offerings with Online Advantage

    Offerings with neither Online nor Offline Advantage

    Offerings with Offline Advantages



    I wrote a previous blog entry on retailing competition between offline and online stores, Will Smartphone-Enabled on-the-Spot Price Comparisons “Upend” Stores’ Business Models?This blog entry takes the previous analysis a step further and considers more explicitly how offline stores might be able to compete with Internet providers. In particular, this examination considers the increasing tendency of consumers to use bricks-and-mortar stores to test out new products, but then buy the products at lower prices on the Internet. How can bricks-and-mortar stores prevent such free-riding or otherwise continue to sustain viable businesses despite the existence of lower prices on the Internet?

  • “Fake News” has become one of the big afflictions of our times. I just Googled the phrase “fake news,” and it generated 174 million hits. No one seems to know anymore whether or not any reported information is true and/or accurate. This has led people to question the truth of everything, particularly if they don’t like what’s been reported.

    Trust in mass media as a whole is declining rapidly across the board. In 1976, 72% of the population had either a great del or a fair amount of trust in mass media. By 2016, that figure had declined to 32%. From Art Swift, “Americans' Trust in Mass Media Sinks to New Low” (and see Figure 1)

    Americans' trust and confidence in the mass media "to report the news fully, accurately and fairly" has dropped to its lowest level in Gallup polling history, with 32 saying they have a great deal or fair amount of trust in the media. This is down eight percentage points from last year.

    Gallup began asking this question in 1972, and on a yearly basis since 1997. Over the history of the entire trend, Americans' trust and confidence hit its highest point in 1976, at 72...

    Figure 1

    1 trust media 

    Access to true and accurate reporting of news and information is pivotal for justice and democracy to prevail. Yet, it’s become extremely difficult to ferret out the truth from news and information reports. How can we address this problem? That is, how do we encourage people to report complete and accurate information?

  • I’ve been reading a lot about drones, and the more I read, the more I’m convinced they’re going to cause a lot of problems, for everyone – citizens, businesses, and government alike.


    Here’s some background information that lays out some relevant issues.


    •  Drones are available to anyone.

    Drones are cheap to buy, and they can be built from off-the-shelf parts (see, for example “Building a Drone vs Buying One – Which is Best?”). So while the government could theoretically “require” people to register drones, there’s no way to enforce that requirement.


    •  It is difficult to identify drone owners and thus their intent.

    In this sense, drones are similar to cyberattacks. In “Marching off to cyberwar,” The Economist indicates that

    A cyberattack on a power station or an emergency-services call centre could be an act of war or of terrorism, depending on who carries it out and what their motives are.

  • “Honest” Distortions of Information on the Internet

    Not-So-Honest Distortions of Information on the Internet

    Propagation on the Internet Promotes Distortion of Information

    Governments Use the Internet to Spread Propaganda and Misinformation

    Defenses Against Information Distortion

    Consequences of Information Distortion



    We all know there’s a lot of misinformation on the web. I started reading about this, and I soon discovered that the subject is a lot more complex that I had initially thought. There are two issues that I found particularly interesting:

    1. The distinction between “honestly” inaccurate or manipulated information and purposely inaccurate or manipulated information; and

    2. The dynamic surrounding how information becomes distorted as it passes from user to user on the Internet.

    This analysis discusses (i) each of these two issues, (ii) defenses against being a victim of misinformation, and (iii) consequences of the increasing prevalence of misinformation on the Internet.

  • Does Apple Dominate the MP3 Player & Smartphone Markets?

    Apple iPod & iPhone Sales Timeline

    How Did Apple Manage the Growth of Its Ecosystem to Create Value?

    Would Even More Value Have Been Created If Apple’s System Had Been Open?


    A recent article in Newsweek, “Think Really Different” by Daniel Lyons, laments the fact that Apple’s ecosystem is a closed system, which represents paradigm shift from the prior, open system the PC industry and post-Internet world had evolved into:

  • Which actions should government take to spur economic activity during economic recessions?

    Liberals tend to believe in Demand Side Economics, that is, demand drives the economy. So during recessions, government should stimulate demand through spending. Conservatives, on the other hand, tend to believe in Supply Side Economics, that is, supply drives the economy. In that case, during recessions, government should stimulate supply by promoting new production.

    Who’s right?

    Figure 1

    1 d v s 

  • The Technology Triangle

    Years ago I attended a meeting on intellectual property (IP). One of the speakers, a sharp IP attorney named Pat Ellison, gave a talk, which greatly resonated with me. He said that a successful technology requires a balance between technology, business, and law, as represented by the triangle in Figure 1. (I recently contacted Pat about the origin of this idea and he said he was fairly sure that the idea was developed collaboratively with others, but he couldn’t remember who the other contributors were.) Very succinctly, descriptions for the requirements are:

    • Technology: The technology must work well.
    • Business: The technology must be cost effective, that is, is must able to be manufactured and sold for a profit.
    • Law: The legal and regulatory underpinnings of the technology, including intellectual property foundations and liability issues, must be sound.

    A successful technology will exhibit balance in each of the three areas in the sense that if any of the three is too weak – the technology doesn’t function well, the technology cannot be sold for a profit, and/or the intellectual property is invalid or ineffective or other regulatory issues have not been settled – then the technology will not become commercially successful.

    Figure 1


  • Introduction

    Basic Macroeconomic Relationships

    The Quantity Theory of Money

    Purchasing Power Parity

    Interest Rates

    Gross Domestic Product

    Putting It All Together

    Data for Select Countries

    Exchange Rate Basics



    Pros and Cons of a Strong or Weak Currency

    Why Depreciate One's Currency?

    Methods for Depreciating a Currency

    Currency Wars

    Definition of Currency War

    Definition of the Currency Game

    The Disadvantages of Currency Manipulation

    Other Comments on Currency Wars




    Currency wars have been all the rage lately. 

    Paul Krugman, is an economist, a Nobelist, in fact, who I respected greatly when I was in graduate school, studying his work on international trade.  However, over the past several years, I’ve come to view him as a complete sell-out, and as someone who twists economists (both theoretical and empirical) to promote his own completely tainted viewpoint.  In his Feb 15, 2013 NYT blog entry, “Currency War Confusions”, he wrote:

    OK, people have been asking me where I stand on the “currency war” issue. My answer is that it’s all a misconception, and it would be a very bad thing if policy makers take it seriously.

    First of all, what people think they know about past currency wars isn’t actually true. Everyone uses some combination phrase like “protectionism and competitive devaluation” to describe the supposed vicious circle of the 1930s, but as Barry Eichengreen  has pointed out many times, these really don’t go together. If country A and country B engage in a tit-for-tat of tariffs, the end result is restricted trade; if they each try to push their currency down, the end result is at worst to leave everyone back where they started.

    And in reality the stuff that’s now being called “currency wars” is almost surely a net plus for the world economy. In the 1930s this was because countries threw off their golden fetters — they left the gold standard and this freed them to pursue expansionary monetary policies. Today that’s not the issue; but what Japan, the US, and the UK are doing is in fact trying to pursue expansionary monetary policy, with currency depreciation as a byproduct. Expansionary policy is what the world needs, so why is this a bad thing?

    True, Europe may feel that it’s suffering a loss of competitiveness. But there’s an answer for that: emulate the other advanced countries, and have the ECB join in the expansion. Indeed, if fear of an overvalued euro finally undermines the ECB’s monetary hawks, that’s good for everyone.

    When it comes to currency depreciation, right now the only thing we have to fear is fear itself.

    Personally, I couldn’t disagree more.  I believe that the current “Currency wars”, far from being “almost surely a net plus for the world economy”, instead represent a classic prisoner’s dilemma game, in which the whole world is going to end up much worse off than before, with much higher prices, much higher inflation, and much greater uncertainty in world markets.

    This blog entry, “Making Sense of the Currency Wars”, makes this case.

    I tried to make the dry basic economics stuff at the beginning as brief as possible, while still being comprehensible.  Like most things in life, you have to get through the dry, boring basics before you can appreciate the good stuff.  For those of you who are already familiar with the basics, feel free to skip to the latter part of the analysis.

  • This analysis, Managing the Global Commons, with an Emphasis on Outer Space, has three parts:

    * Part 1: Description of the Commons

    * Part 2: Methods of Management

    * Part 3: The Case of Outer Space

    A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


    Part 1: Description of The Commons


    Definition of The Commons

    Wikipedia defines the commons as

    …[T]he cultural and natural resources accessible to all members of a society, including natural materials such as air, water, and a habitable earth. These resources are held in common, not owned privately.

    And it defines global commons as (emphasis mine)

    …[I]nternational, supranational, and global resource domains in which common-pool resources are found. Global commons include the earth's shared natural resources, such as the deep oceans, the atmosphere, outer space and the Northern and Southern polar regions, the Antarctic in particular. Cyberspace may also meet the definition of a global commons.

  • A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


    In Part 1: Description of the Commons, I provided a definition of the commons, together with graphical depictions of commons situations. I also defined the concept of Common Heritage of Mankind.

    Now that we have a clear definition of the types of situations we're dealing with, we can move on to trying to figure out how to manage them.


    Part 2: Methods of Managing the Commons

    The commons represent situations of market failure, due to the presence of negative externalities. Left to their own devices, free markets associated with use of the global commons will generally result in situations of overuse, relative to the socially efficient level. Historically, economists have proposed various forms of public intervention into the free markets to better manage the commons, including the imposition of taxes or quotas or the designation of property rights.

  • A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


    The Case of Outer Space

    Now that we have all the boring basics out of the way, we can move onto the good part — the analysis of Space: the Final Frontier!

    This section starts off with an overview of the size and distribution of man’s activities in outer space. It then uses the analyses presented in the previous section (Methods of Managing the Commons) to propose some principles for the management of human activities undertaken in outer space generally.

    The next blog entry will discuss the specific cases of the management of (i) space traffic and (ii) orbital debris.


    Distribution and Size of Space Activity

    A few statistics as to the size and distribution of activities in space are presented here, courtesy of The Tauri Group, “2014 State of the Satellite Industry Report.”

  • A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


    The Problem of Space Traffic Management


    Description of the Problem

    As we saw in the previous section, Distribution and Size of Space Activity, satellite activity encompasses a large portion of space activity. The primary function of satellites (displayed in Figure 6) is the provision of communications and information services. The ongoing provision of such services by satellites requires the use of two forms of common pool resources in outer space: (i) slots in LEO or GEO in which to orbit and (ii) room in the radiofrequency spectrum in which to transmit and receive signals.

  • This is a presentation I’m preparing for “Tech Startup Conference: Artificial Intelligence” being held on September 26, 2017.

    1. Issues Covered

    • Adoption of New Technology Systems: What does it take for new technologies to become successfully adopted in the marketplace? Why do some technologies become adopted while others do not?
    • Value Creation: How do the components of the system combine to create value for the different players? Can the environment be changed so that the system will create more value?
    • Value Extraction: How much value does each player extract? In particular, are players extracting as much value from the system as they can?
  • Persuasion technologies include methods and techniques derived from behavioral psychology and behavioral economics used to shape the choices people make. The favorable environment for using such methods, enabled by people’s increasing use of computers and smartphones, has led to the proliferation of their use by software developers.

    Like any technology, persuasion technologies can be used for good or evil. However, the increasing dependence of people on digital technologies, together with the increasing prevalence of software developers’ use of persuasion technologies has created emergent behavior in society that’s downright ugly: the emergence of extremism, outrage, and divisiveness among members of society.

    This analysis is closely tied to a previous analysis I performed, “Information Distortions on the Internet.”

    This analysis will examine

    • The nature of persuasive technologies
    • The game between software developers and users that has created an environment of good, bad, and ugly
    • How the environment might be changed to create more favorable social outcomes
  • Conversion to $1 Coin: US Government

    Conversion to $1 Coin: Private Industry

    Conversion to $1 Coin: Consumers

    Special Interest Groups

    Other Issues

    Efficiency of US Currency


    A recent article in the WSJ, “The Buck Stops Here: $1 Coins to Be Curtailed” by Jeffrey Sparshott, reports that the US Mint is suspending production of $1 coins, due to lack of demand. The issue of replacing the US $1 bill with a $1 coin has been debated for quite some time. When I was in graduate school 20 years ago, one of my professors was commissioned to perform a cost-benefit analysis of replacing the $1 bill with a $1 coin, and I worked as a research assistant on the project. I spent my summer that year contacting various representatives in the economy who would be affected by the conversion and collecting information from them on the costs and benefits. I learned some very interesting things.