Economic impacts of the Internet:

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U10988The Economics of the Internet (ENET)

• Lecture 5
• Economic impacts of the Internet
• globally, nationally and on different sectors

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Todays objectives

• to identify some of the main ways in which the
  Internet has impacted on the economy
• to focus on a few of the key questions that are
  raised for economists (some other issues will be
  addressed specifically in later lectures - and
  some will be covered in your essays and
  presentations)

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Reading and further references

• Some key references are given on slides at the
  end of this presentation
• For more details see the links5.html file -
  available on the ENET web site
• Check out relevant topics too on my enetstuff blog

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Some key questions

• E-commerce - how important has it become ?
• What factors can explain the different
  penetration rates of Internet sales for different
  categories of goods and services?
• What have been the other main effects of the
  Internet in other areas of the economy?
• Has the Internet improved productivity in the
  economy?
• Is there such a thing as the "New Economy"?

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Effects of the Internet and e-commerce (1)the
death of distance

• global markets and reach
• opportunities for extending the geographical
  limits of the marketplace - more specialised
  (niche) markets can become viable
• The Internet reduces the effective distance
  between
• producers and consumers.
• Every cheapening of the means of communication
  alters the action of the forces that tend to
  localised industries Alfred Marshall (1916)

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Effects of the Internet and e-commerce (2)lower
production costs and efficiency gains

• economies of scale and scope, and mass
  customization
• new ways of working - more opportunities for Just
  In Time (JIT) production, organisational changes
  within firms - the use of the internet for B2B
  transactions - it enables the transformation of
  existing business models - it alters for ever the
  processes of production, marketing, advertising,
  sales etc. Steven M Case, former CEO of AOL
• dis-intermediation and re-intermediation - the
  elimination of some intermediaries and the
  creation of some new ones -Carr (2000) early
  assumption of e-commerce was that people would
  buy direct from manufacturers not what has
  happened

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Effects of the Internet and e-commerce (3)lower
barriers to entry?

• relatively easy and cheap to set up a web site,
  but...
• long-term success requires substantial investment
  in technological and organisational
  infrastructure, brand advertising etc.
• competitors may respond by using strategies which
  exploit network externalities and lock-in

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Effects of the Internet and e-commerce (4)lower
transaction costs

• for consumers it is easier to compare prices -
  search costs are reduced - browsing is easier
  than visiting stores - use of shopbots and
  comparison shopping sites - overall transactions
  costs may also be lower
• for producers there is no need to maintain costly
  shop front displays - menu costs are reduced

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Effects of the Internet and e-commerce (5)lower
prices ?

• Sellers can exploit the Internet and evade market
  pressures by
• tracking rivals price movements
• collecting information on customers so that they
  can be more effective in product differentiation
  and price discrimination
• reducing the effectiveness of price search
• raising switching costs by devices such as
  loyalty schemes, versioning, bundling etc.

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Frictionless Commerce? Results of the
Brynjolfsson Smith study

• prices are 9-16 lower on the Internet (depends
  on whether taxes, shipping and shopping costs are
  included)
• Internet retailers adjust prices more often and
  by smaller amounts (lower menu costs in Internet
  channels)
• But brand awareness and trust matter even for
  homogeneous goods sold on the Internet

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Frictionless Commerce? Other evidence and models

• Daripa and Kapur (2001) cite studies by Goolsbee
  and by Brown and Goolsbee for the retail
  insurance and computer markets which support the
  hypothesis of lower prices due to Internet
  competition other studies by Clay et al. See
  too Ancarana and Shankar.
• Remember the Internet increases the information
  to sellers as well as to buyers - in general the
  market outcome depends on the relative ability of
  each side to exploit the information

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How important has e-commerce become?

• US E-commerce stats 2005 Q4
• 26 billion - up 23 on 2004 Q4
• (Source US Census Bureau - Dept of Commerce)
• UK E-Commerce stats - 2002 Q3
• 2 billion - up 114.5 on 2001
• (Source Office for National Statistics)
• Evidence that E-commerce is spreading to new
  areas e.g. jewellery, watches, furniture
• Growing fast - but still small of total retail
  sales
• 4 in UK - only around 2½ in US
• Dont forget B2B e-commerce 80 of UK
  e-commerce
• and even higher proportion in the US

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How important has e-commerce become? (2)

• Official and unofficial statistics
• Most popular online purchases are CDs, DVDs and
  books but 1/3 Internet users have bought an
  airline ticket online in the last year 1/5 has
  booked a holiday online Biannual Continental
  Research, Sep 2003
• September 2005 Forrester Research reports that
  1/3 US households now shop online with annual
  sales standing at around 100 billion
• A variety of definitions and methodologies used
  to produce estimates such as these.

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How important has e-commerce become?
(3) E-commerce sales in the USSource US Census
Bureauhttp//www.census.gov/mrts/www/data/html/05
Q4.html
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How important has e-commerce become?
(4) E-commerce sales in the USSource US Census
Bureauhttp//www.census.gov/mrts/www/ecomm.html
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How important has e-commerce become?
(5) Penetration rates vary by expenditure category

• of US total retail sales online,2002
• Computer hardware 44
• Other consumer electronics 2.5
• Books 13
• Office equipment and supplies 13
• Furniture and home furnishings 2.7
• Food and beverages 0.2

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How important has e-commerce become?
(6) different e-commerce business models

• Pure-play Internet companies and multichannel
  bricks and clicks companies
• Specialist companies for niche products
• 0nline ordering and payment (perhaps with Rich
  Internet Applications to allow product
  visualisation and customisation)
• Central warehouse or delivery from local shop
• Integrated or outsourced delivery (e.g. using
  Royal Mail)
• Partnerships (e.g. for a while Amazon and
  ToysRUs)
• Digital downloads for digital goods (e.g. iTunes)

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How important has e-commerce become? (7)

• Laseter, Rabinovich and Huang (2006) The Hidden
  Cost of Clicks argue that
• ..targeting a huge market does not guarantee
  success..
• Important factors are cost-to-serve economics
  (the total supply chain costs from origin to
  destination) and
• The value-to-weight ratio
• The authors discuss the success of Amazon with
  books but not with toys, and the success of eBags
  with luggage but not with shoes

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Effects of the Internet and e-commerce travel
and tourism

• Growth of new companies such as Expedia,
  Travelocity, LastMinute.com, as well as websites
  for airlines, hotels, car-rentals etc,
• Travel and tourism is the fastest growing
  internet shopping area up 159 in Europe
  between 2003-2004
• 10 of the sectors sales were online in 2004
• Source Visa, IMRG

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Effects of the Internet and e-commerce groceries

• Some early disappointments and failures - survey
  in The Grocer (2002)
• But success for Tesco see Hoyt (2002) Tesco
  delivers Stanford University Case Study
• Lessons learned and online customers better
  aware of trade-offs between product range, price
  and reliable delivery - see Boyer et al (2003)
  Lessons from online groceries MIT Sloan
  Management Review
• Other supermarkets now much improved (Computing
  Which? July 2005)

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Effects of the Internet and e-commerce labour
markets

• changing nature of many jobs - implications for
  education and training teleworking (2.5 m
  people in UK 8 of workforce, BBC Business News
  4/10/05) - sales people and others in the
  field can be in regular communication and can
  transmit information electronically
  (automatically)
• impact on unionisation and wage inequality issues
• outsourcing and off-shoring a recently
  published US study (March 2006) concludes that
  dire predictions of job losses to India and China
  are greatly exaggerated
• job search and recruitment in cyberspace
  (Monster.com offering 44000 jobs in Britain July
  2005 Source The Observer)

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Effects of the Internet and e-commerce financial
markets

• E-banking (or Internet banking or online banking)
  - online access to account information and the
  ability for account holders to move funds between
  accounts opportunities for banks to sell other
  products to online users
• 24/7 online information for market participants
  (stocks and shares, currency, precious metals
  etc.)
• direct access to financial markets for share
  holders to buy and sell online

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E-banking some recent figures

• In the UK 12 m people used Internet banking in
  2004 - up from 3.5 m in 2000 BBC News November
  2004
• Datamonitor forecasts that there will be 84
  million Internet banking customers in Europe by
  2007. Nua.com Mar 28 2003
• Over 29 m Americans banked online in 2003 - up
  from around 7 m in 1998 Jupiter Research and
  Nua.com

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E-banking reasons for non-participation

• lack of Internet access and/or confidence in
  using the technology (demographic variations)
• concerns about security, trust, privacy, fraud
  phishers and hackers, key logging software and
  dummy websites.

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Effects of the Internet and e-commerce many
other sectors affected

• Examples
• Music and movies
• Broadcasting
• Publishing
• Education
• Telecommunications
• Electronic games
• Gambling and gaming
• Health
• House purchasing real estate agents

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Music and the movies digital downloads

• Legal digital music downloads at 6 of total
  record sales in October 2005 (3 times the 2004
  level) In the singles market downloads now
  ahead. Source International Federation of the
  Phonograph Industry
• Apples iTunes and other legal download sites
• Amazon reported to be working on a digital music
  download service
• Interesting question Should all tracks be
  priced the same?
• Amazon in talks with Paramount Pictures,
  Universal Studios and Warner brothers about a
  download and burn to DVD movie and TV programmes
  service
• Apple also testing the water for a movie download
  service
• Legal and educational moves to stop Internet
  piracy

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Broadcasting, podcasting, multicasting and
webcasting and slivercasting

• BBC already making available radio programmes on
  its website
• Special podcasts and webcasts also now available
• BBC also trialing a multicast system for
  continuous online broadcasting TV programmes
  direct to PCs via the Internet
• Other companies providing programmes for niche
  audiences (narrowcasting or slivercasting)
  e.g. NarrowStep of London and the RooGroup of New
  York
• An example of targeting what Chris Anderson (of
  Wired magazine) calls the long tail (see also
  Brynjolfsson, Smith and Hu)

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Effects of the Internet and e-commerce economic
stimulation

• stimulates a whole new range of services
  (information goods)
• may accelerate sectoral shift from manufacturing
  to services
• acts as an engine of growth - but beware of the
  argument that there will be no more recessions
  say Shapiro Varian

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Characteristics of information goods

• anything that can be digitised
• high fixed costs but low (possibly virtually
  zero) marginal costs
• there may be network externalities

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Has the Internet improved productivity in the
economy? (1)

• Baily and Lawrence (2001) present evidence for
  the USA to show that Total Factor Productivity
  (TFP) has accelerated across all sectors and that
  this is driven by IT (particularly the
  Internet).
• Their figures suggest a structural productivity
  acceleration of about 1.6 percentage points for
  the period 1995-2000, compared with 1985-1990.

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Has the Internet improved productivity in the
economy? (2)

• Varian and Litan (2002) suggest that
• the cumulative cost savings for US companies from
  using the Internet is of the order of 155
  billion and
• the country's productivity has almost doubled its
  historic rate.

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Is there a New E-conomy? Hype and bubbles or
fundamental change?

• New Rules for the New Economy
• Kevin Kelly (Editor of Wired magazine)
• Technology changes, economic laws do not
• Shapiro and Varian (1999)

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Is there a New E-conomy?
Is there a New E-conomy? No need for new
types of economic analysis

• Shapiro and Varian (1998) argue that standard
  economic
• principles are relevant for the analysis of
  information
• goods and the New Economy - although they may
• perhaps be seen in sharper relief
• e.g high fixed costs/low marginal costs,
• product differentiation and price
• discrimination, lock-in etc

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Key papersPrice levels and price dispersion
online and offline

• Ancarani, F and Shankar, V (2004) Price levels
  and price dispersion within and across multiple
  retailer types further evidence and extension.
  Journal of the Academy of Marketing Science 32(2)
  176
• Bakos, J Y (1997) Reducing buyer search costs
  implications for electronic market places.
  Management Science 43(12) 1676-1692
• Brynjolfsson, E and Smith, M (2000) Frictionless
  Commerce? A Comparison of Internet and
  Conventional Retailers Management Science
  46(4), 563-85
• Daripa, A and Kapur S (2001) Pricing on the
  Internet OREP 17(2), 202-216.

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Key papers How important has E-commerce become?

• Bakos, J Y (2001) The emerging landscape for
  retail e-commerce. Journal of Economic
  Perspectives 15(1) 69-80.
• Mesenbourg (2000) Measuring electronic business
  definitions, underlying concepts and measurement
  plans.
• US Census Bureau (2006) E-commerce FAQs
  p//www.census.gov/mrts/www/efaq.html
• Williams, M (2001) Measuring E-Commerce - the ONS
  approach.

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Key papersHas the Internet improved
productivity?

• Varian H R and Litan R E (2002) The Net Impact
  Study.
• Varian, H R (2002b) Netting a Profit.
• Nordhaus, W (2001) Productivity Growth and the
  New Economy
• Oulton, N (2002) ICT and productivity growth in
  the United Kingdom

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Key papers and books - Is there a New E-conomy?

• Greenspan, A (1998) Is there a New Economy?
• Baily M N and Lawrence R Z (2001) Do we have a
  new E-conomy? American Economic Review 91(2)
  308-312
• Kelly K (1998) New Rules for the New Economy.
• Shapiro C and Varian H R (1999) Information
  Rules. A Strategic Guide to the Network Economy.

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Thats all folks!

• Any questions?