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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payment systems

  • Assessing the Ban of 500 and 1,000 Rupee Notes

    On Tuesday, November 8, 2016, India’s Prime Minister, Narendra Modi, announced that he would pull 500 and 1,000 rupee currency notes from circulation. The move is an attempt to nullify untaxed (“black”), corrupt, and counterfeit currency. Eventually, new bills will replace the old ones, but in the meantime, only low value notes will be considered legal tender. As The Indian Express, “Rs 500, Rs 1000 currency notes stand abolished from midnight: PM Modi” reports:

    In a major step to check black money, Prime Minister Narendra Modi on Tuesday announced demonetization of Rs 500 and 1000 currency notes with effect from midnight, making these notes invalid in a major assault on black money, fake currency and corruption. In his televised address to the nation, Modi said people holding notes of Rs 500 and Rs 1000 can deposit the same in their bank and post office accounts from November 10 till December 30.

    How reasonable a policy is this? That is, will it accomplish its purpose while minimizing collateral damage?

  • Bitcoin: Wave of the Future or Flash in the Pan?

    Essential Requirements of a Currency

    Essential Functions of a Currency

    Essential Characteristics of a Currency

    About Bitcoin

    What Is Bitcoin?

    Advantages of Bitcoin relative to Other Currencies

    Disadvantages of Bitcoin relative to Other Currencies

    Will Bitcoin Survive as a Global Currency?

    Does Bitcoin Satisfy the Essential Requirements of a Currency?

    Does Bitcoin Suffer from Fatal Disadvantages?

    Conclusions

    Useful Articles

    Bitcoin is one of the hottest new technologies on the scene. It started out as a niche tool for cyberpunks and anarchists to use to conduct online transactions. However, it has become increasingly embraced by more mainstream users, as global financial crises and massive amounts of government increases in money supplies have continued to wreak havoc on people’s trusts in the traditional financial systems. Some extol Bitcoin as the future of global currency, while others write it off as a speculative bubble and are quick to predict its impending demise. So which is it? Wave of the future or flash in the pan?

  • Making Sense of the Currency Wars

    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

    Definition

    Determinants

    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

     

     

    Introduction

    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.

  • Playing the $1 Coin Game

    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.

  • Playing the Currency Game

    The Structure of the Currency Game

    Definition of Volume of Trade

    Patterns in Volume of Trade by Country GDP

    Patterns in Trading Partners

     

     

    In my previous blog entry, “Making Sense of the Currency Wars”, I discussed the basics of exchange rates – how they’re defined, how they’re determined, and the pros and cons of having a strong or weak currency – and I discussed currency wars – how they work and how they affect participant economies. I also defined how currency (exchange rate) wars form a game between countries, where the losses of losers would appear to far outweigh the gains of winners. In this blog entry, I take a closer look at the currency game.

  • Playing the Mobile Payments Game v.1 (Pre-Mobile): 1950 – 2010ish

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

     

    The establishment of the general-purpose credit card system (in the US) is, for all intents and purposes, the basis upon which the mobile payment systems game is based.  The use of credit to pay for purchases of goods and services actually goes way back – nearly 3,000 years ago to ancient Babylon and Egypt. However, the use of general-purpose credit cards (as opposed to particular store credit cards) in the US started in 1950. The players in this initial credit card game included (i) the Banks or Credit Card Companies who issued the cards, (ii) Users who used credit cards issued by the Credit Card Companies to purchase goods and services from Merchants, and (iii) Merchants who accepted credit cards from Users as a form of payment for goods and services.  Over the next 60 years or so, the game between these three sets of players remained essentially unchanged.

  • Playing the Mobile Payments Game v.2: 2010ish - 2015

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

     

    In Part 1 of this analysis, I described the pre-mobile payments game, which involved Users, Merchants, and Credit Card Companies. I also disussed three significant features of the pre-mobile game: (i) Credit card fraud is a huge cost for Credit Card companies; (ii) The Credit Card Companies introduced a new credit card system in 2005 that is contactless and more secure than the current system, but the new technology has been slow to become adopted in the US; and (iii) High credit card fees have generated resentment from (Users and) Merchants toward the Credit Card Companies, and in 2012 the Merchants established a consortium, MCX, to develop an alternative payment system that would bypass the credit card system.

     Version 2 of the Mobile Payments Game starts after the introduction of smartphones. The widespread adoption and use of smartphones has paved the way for the development and recent introduction of mobile payment systems. It seems reasonable to assume that since smartphones enable mobile payment systems, eventually, Users will come to expect their smartphones to offer that capability. What this means is that any smartphone provider who hopes to gain widespread market share of their handsets will have to offer a mobile payments system. Of course, in theory, a smartphone provider can always offer someone else’s mobile payment system on his handsets – say, Apple could offer a Google-designed system for use on iPhones – but this would be a foolish move strategically for major systems providers. They would be passing up an extremely valuable opportunity for generating revenues, data, product differentiation, and/or general promotion of proprietary (branded) technology ecosystems.

    Since Apple and Google currently provide the majority of smartphone operating systems, and since the two behemoths seem to have developed a need to compete in every possible market, it should come as absolutely no surprise that Apple and Google have been developing their own mobile payment systems. Also, based on the tremendous antipathy that has been developing for decades by Merchants against Credit Card Companies, it’s also logical that Merchants have been developing a mobile payment system that will bypass the Credit Card Companies. The last group of early mobile payment systems developers is the Mobile Carriers.  The Mobile Carriers probably figured that since they have direct access to smartphone Users through their mobile services offerings, it would make sense for this relationship to serve as a means of them getting their finger in the humongous consumer credit card payments pie, if at all possible.

  • Playing the Mobile Payments Game v.3: 2015 - Present

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

     

    The latest version of the Mobile Payment Systems Game started in early 2015, with two significant changes in the structure of the Game.  First, the Mobile Carriers surrendered to Google. And second, Samsung entered into the game with its acquisition of a technology company that provides an alternative to Google Wallet. PayPal also joined the Game, allying itself with the Merchants, though this is a less-significant change than the other two. The structure of the game is presented in Figure 5.

  • Playing the Visa EMV Game

    Structure of the Visa EMV Game

    Outcome of the Visa EMV Game

    What Can Visa Do to Speed Up Adoption of EMV?

     

    Visa’s EMV ("Europay, MasterCard and Visa") technology standard (aka "Chip and PIN") -- used for credit card processing -- was introduced several years ago as a means of decreasing credit card fraud.  This new EMV standard has passed well into the intermediate stages of adoption in virtually all countries in the rest of the world.  However, EMV adoption in the US has barely taken hold.  Visa has made a recent push to encourage US Merchants to upgrade their Visa credit card processing systems to the EMV standard.  Interestingly, the media has noted that while the Merchants who accept Visa credit cards as payment for purchases made by their Customers will have to bear the majority of the total costs to industry associated with the technology upgrade, it will be the Issuers who realize the majority of the benefits of decreases in credit card fraud.

    An analysis of this game was undertaken as a means to better understand the dynamics among industry players involved with adoption of EMV.  The following is an excerpt from the analysis.  A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.