“Productonomics”

“Maximize value and minimize cost.” – - A very wise person.

“Easier said than done.” – - An even wiser person.

Productonomics was just some (semi-stolen) term I made up to describe a simple, and, not totally original concept… the application of economic principles to technology-based product management/ development. I was an economics major in college, and like a lot of people who study a social science; I left college thinking that I had a good toolbox of knowledge that was probably going to be completely useless in the real world. Aside from some of the statistics and finance stuff I learned, a lot of Economics just seemed to be sort of high minded, theoretical, and honestly … more philosophy than science.

Then…  my experience in the digital music space had a lot to do with my quest for a “deeper wisdom” that would cut through the chaotic noise of pundits, analysts, industry insiders, and public opinion. Hot, disruptive sectors are always loud, chaotic, and full of misinformation, and hasty conclusions. As a fairly entrenched insider, I had access to a lot more information about what was really going on, but it didn’t necessarily make things any clearer when it came to developing solutions and making good decisions. What clarified the landscape for me was a good hard look at the real incentives of the various players. Price theory, monopoly, rent-seeking, marginal theory, the theory of value… these were the concepts that provided clarity – these were the concepts that shed light on who was doing what and why, based on their incentives and the existing parameters of the market. The names of the companies, the new technologies, and the people in charge start to fade in the face of real, fundamental understanding of markets and incentives. So, I came to some basic conclusions:

  • Understanding micro-economic principals can help us day to day.
  • Understanding theoretical and historical concepts around human behavior is valuable and provides guidance at a very fundamental level.
  • It can be very helpful to learn to “think like an economist” – focus on incentives and market forces, and never assume that a situation is unique.

What is it we do when we “do work”.  Write documents? Write Code? Assign Tasks? Have Meetings?  This isn’t really the work we do- the real work we do is to acquire knowledge, design solutions, and make decisions. From this process, we birth products and our customers use them and react. 

My goal at every company that I work at is to try and instill some discipline around trying to understand our decision process – no soapbox here  – - this applies to me too. It’s all about turning information into knowledge, knowledge into insight, insight into correct decisions.

Key Principles to Know and Love:

Principles are the fundamental components of economic thinking, and a surprising number of them are incredibly useful, believe it or not, in daily decision-making.  They are often misunderstood and misused, and those fallacies, can often lead to common product and marketing mistakes… believe that. I think everyone should learn and love as much of the list of principles listed below as possible! I mean … I most people are going to look at that list and groan, but seriously – good stuff in Economics – no lie (Hawaiian pidgen for “I am not lying to you.”)

  • Equilibrium Theory
  • Demand elasticity
  • Short-run and long-run equilibria
  • Price elasticity of supply
  • Consumer surplus, producer surplus, Price discrimination, and market efficiency
  • Tax incidence and deadweight loss
  • Scarcity, choice, and Opportunity Cost
  • Marginal Analysis
  • Marginal utility
  • Marginal use
  • Marginal Cost
  • Marginalism
  • Theory of consumer choice
  • Total utility and marginal utility
  • Utility maximization
  • Individual and market demand curves
  • Income and substitution effect
  • Production and costs
  • Production functions: short and long run
  • Marginal product and diminishing returns
  • Short-run costs
  • Long-run costs and economies of scale
  • Cost minimizing input combination
  • Firm behavior and market structure
  • Profit, Profit maximization, Normal profit
  • Perfect competition
  • Efficiency and perfect competition
  • Monopoly, Oligopoly, Monopolistic competition
  • Sources of market power
  • Price discrimination
  • Interdependence, collusion, and cartels
  • Game theory and strategic behavior
  • Product differentiation and role of advertising
  • Excess capacity and inefficiency
  • Factor Markets
  • Derived factor demand
  • Marginal revenue product
  • Labor market and firms’ hiring of labor
  • The Role of Incentives and Property Rights
  • Pareto Efficiency
  • Fallacy of Sunk Cost
  • Theory of value
  • Game theory and Nash equilibrium
  • Discounted Utility
  • Inter-temporal Choice
  • Consumer Good Theory
  • Network Goods
  • Positional Goods
  • Complementary Goods
  • Substitute Goods