The impact of the Internet on the economy

1
U10988The Economics of the Internet (ENET)

• Lecture 5
• The impact of the Internet on the economy -
• globally, nationally and on different sectors

The Economics of
the Internet Guy Judge, February 2005
2
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)

The Economics of
the Internet Guy Judge, February 2005
3
Reading and further references

• Some key references are given on slides at the
  end of this presentation
• For more details see the links3.html file -
  available on the ENET web site

The Economics of
the Internet Guy Judge, February 2005
4
Some key questions

• How important has E-commerce become?
• Does the Internet make the economy more
• competitive?
• Has the Internet improved productivity in the
  economy?
• Is there such a thing as the "New Economy"?

The Economics of
the Internet Guy Judge, February 2005
5
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
  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)

The Economics of
the Internet Guy Judge, February 2005
6
The Internet is by no means the first
innovation to contribute to this process

• Improved transportation and communication has
  come before from
• roads, ships, canals, railways, airways etc.
• mail, telegraph, telephone, fax etc.
• Other forces have contributed to globalisation,
  but the Internet has transformed and accelerated
  this process

The Economics of
the Internet Guy Judge, February 2005
7
Effects of the Internet and e-commerce (2)lower
production costs and efficiency gains

• economies of scale and scope
• new ways of working - more opportunities for Just
  In Time (JIT) production, organisational changes
  within firms - the use of the internet for B2B
  transactions
• disintermediation and reintermediation - the
  elimination of some intermediaries (but the
  creation of some new ones)
• mass customization

The Economics of
the Internet Guy Judge, February 2005
8
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

The Economics of
the Internet Guy Judge, February 2005
9
The PIU says

• e-commerce demolishes many existing market
  barriers whether they be
• geographic
• custom and practice
• market separation
• business scale
• PIU - Performance and Innovation Unit
• (part of the UK Cabinet Office)

The Economics of
the Internet Guy Judge, February 2005
10
PIU team believes e-commerce is important because
of

• its dramatic growth and potential
• the major impact it can have on barriers to
  market entry
• the way it enables increased efficiency and
  effectiveness within existing business models
• the way it enables the transformation of existing
  business models - it alters for ever the
  processes of production, marketing, advertising,
  sales etc. Steven M Case, CEO of AOL

The Economics of
the Internet Guy Judge, February 2005
11
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

The Economics of
the Internet Guy Judge, February 2005
12
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.

The Economics of
the Internet Guy Judge, February 2005
13
Frictionless Commerce?Does the Internet cause
prices to be lower and more flexible?

• Study by Brynjolfsson and Smith (2000)
• comparison of Internet and conventional retailers
• two categories of homogeneous products - books
  and CDs
• over 8500 price observations collected over a
  period of 15 months (Feb 98-May 99)

The Economics of
the Internet Guy Judge, February 2005
14
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

The Economics of
the Internet Guy Judge, February 2005
15
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
• Remember the Internet increases the information
  to sellers as well as buyers - in general the
  market outcome depends on the relative ability of
  each side to exploit the information

The Economics of
the Internet Guy Judge, February 2005
16
Effects of the Internet and e-commerce (6)labour
markets

• changing nature of many jobs - implications for
  education and training teleworking - sales
  people and others in the field can be in
  regular communication and can transmit
  information electronically (automatically)
• job search and recruitment in cyberspace
• impact on unionisation?
• wage inequality issues
• offshore outsourcing

The Economics of
the Internet Guy Judge, February 2005
17
Effects of the Internet and e-commerce
(7)financial markets

• E-banking - online access to account information
  and the ability for account holders to move funds
  between accounts
• 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

The Economics of
the Internet Guy Judge, February 2005
18
E-banking some recent figures

• One in every five Europeans now banks online -
  expected to double to 30 m by 2007 Forrester
• In the UK 7.8 m people used Internet banking in
  2002 - up from 3.5 m in 2000 BACs
• Over 24 m Americans banked online in 2002 - up
  from around 7 m in 1998 Nua.com
• A study by the Pew Internet and American Life
  Project found that 44 of adult Internet users in
  the US had online bank accounts.

The Economics of
the Internet Guy Judge, February 2005
19
How important has e-commerce become?

• US E-commerce stats 2003 Q4
• 17.2 billion - up 25.1 on 2002
• (Source US Census Bureau - Dept of Commerce)
• UK E-Commerce stats - 2002
• 23.3 billion - up 39 on 2001
• (Source office for National Statistics)
• Growing fast - but still small of total retail
  sales only 1.9 in US and 1.2 in UK
• Evidence that E-commerce is spreading to new
  areas e.g. jewellery, watches, furniture

The Economics of
the Internet Guy Judge, February 2005
20
How important has e-commerce become? (2)

• Goods continue to represent the largest share of
  the value of Internet sales by UK businesses -
  around 66 in 2002. Services sold online
  accounted for 29
• Dont forget B2B trading. In 2002 UK businesses
  spent 22.9 billion online
• ONS e-trading statistics have now been
  reclassified as experimental work continues
  on international benchmarking of e-commerce data.

The Economics of
the Internet Guy Judge, February 2005
21
Electronic commerce definitionsUK Performance
and Innovation Unit

• Electronic commerce is the exchange of
  information across electronic networks at any
  stage of the supply chain, whether within an
  organisation, between businesses, between
  businesses and consumers, or between public and
  private sectors, whether paid or unpaid.

The Economics of
the Internet Guy Judge, February 2005
22
e-business and e-commerce (US Census Bureau)

• e-business is any process that a business
• organization conducts over a computer-
• mediated network
• e-commerce is any transaction completed
• over a computer-mediated network that
• involves the transfer of ownership or rights
• to use goods or services

The Economics of
the Internet Guy Judge, February 2005
23
Computer-mediated networks(US Census Bureau)

• Computer-mediated networks are
• electronically linked devices that
• communicate interactively over network
• channels

The Economics of
the Internet Guy Judge, February 2005
24
E-commerce sales(US Census Bureau)

• E-commerce sales are sales of goods and services
  where an order is placed by the buyer or price
  and terms of sale are negotiated over the
  Internet, extranet, Electronic Data Interchange
  (EDI) network, electronic mail or other online
  system. Payment may or may not be made online.

The Economics of
the Internet Guy Judge, February 2005
25
e-commerce online shopping and online purchasing
(Anita Rosen)

• online shopping reviewing products on the
• Internet, gathering information about
• product characteristics and prices
• online purchasing placing an order and
• completing the transaction

The Economics of
the Internet Guy Judge, February 2005
26
E-commerce sales in the USSource US Census
Bureau (Data in m, not s.a.)

• Period Retail sales E-commerce as
• Total E-commerce of Total
  Sales
• 1999 Q4 787,362 5,393 0.7
• 2000 Q1 715,102 5,722 0.8
• 2000 Q2 775,364 6,250 0.8
• 2000 Q3 768,559 7,079 0.9
• 2000 Q4 812,667 9,248 1.1
• 2001 Q1 723710 8,009 1.1
• 2001 Q2 801115 7,904 1.0
• 2001 Q3 777,882 7,894 1.0
• 2001 Q4 850,608 10,788 1.3
• 2002 Q1 740,020 9,470 1.3
• 2002 Q2 818,609 9,761 1.2
• 2002 Q3 822,125 10,465 1.3
• 2002 Q4 864,653 13,770 1.6
• 2003 Q1 772,185 11,928 1.5
• 2003 Q2 858,793 12,464 1.5
• 2003 Q3 872,634 13,248 1.5
• 2003 Q4 918,245 17,226 1.9

The Economics of
the Internet Guy Judge, February 2005
27
Layers of the Internet Economy(Internet
Indicators group at the University of Texas)

• Internet Infrastructure layer manufacturers of
  hardware, telecomms, ISPs etc.
• Internet Applications layer - web software
  producers, consultants, website designers
• Intermediary layer - market makers, advertising
  and membership enablers (eg Yahoo)
• Internet Commerce layer

The Economics of
the Internet Guy Judge, February 2005
28
Internet Economy IndicatorsREVENUE

• Layer 1998 1999 Growth
• Infrastructure 117 198 68
• Application 72 101 41
• Intermediary 64 99 52
• Internet Commerce 100 171 72
• TOTAL 323 524 62
• Figures in billions
• Source Center for Research in Electronic
  Commerce, University of Texas at Austin

The Economics of
the Internet Guy Judge, February 2005
29
Internet Economy IndicatorsEMPLOYMENT

• Layer 1998 1999 Growth
• Infrastructure 527 779 48
• Application 513 682 33
• Intermediary 291 341 17
• Internet Commerce 578 727 26
• TOTAL 1820 2476 36
• Figures in thousands of employees
• Source Center for Research in Electronic
  Commerce, University of Texas at Austin

The Economics of
the Internet Guy Judge, February 5
30
Effects of the Internet and e-commerce
(8)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

The Economics of
the Internet Guy Judge, February 2005
31
Characteristics of information goods

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

The Economics of
the Internet Guy Judge, February 2005
32
Macro effects - on growth, inflation, unemployment

• The PIU report quotes a US Department of
• Commerce report that suggests ICT
• industries disproportionately boost growth
• and lower inflation
• between 1995-1998 they contributed only 8 of US
  GDP, but 35 of GDP growth
• employment - some jobs lost, but new ones created.

The Economics of
the Internet Guy Judge, February 2005
33
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.

The Economics of
the Internet Guy Judge, February 2005
34
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.

The Economics of
the Internet Guy Judge, February 2005
35
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)

The Economics of
the Internet Guy Judge, February 2005
36
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

The Economics of
the Internet Guy Judge, February 2005
37
Key papers - competition and pricing literature

• Daripa, A and Kapur S (2001) Pricing on the
  Internet OREP 17(2), 202-216.
• Brynjolfsson, E and Smith, M (2000) Frictionless
  Commerce? A Comparison of Internet and
  Conventional Retailers Management Science
  46(4), 563-85

The Economics of
the Internet Guy Judge, February 2005
38
Key papers - How important has E-commerce
become?

• UK National Statistics International e-Commerce
  benchmarking
• http//www.statistics.gov.uk/downloads/theme_comm
  erce/e_commerce_report.
• Mesenbourg (2000) Measuring electronic business
  definitions, underlying concepts and measurement
  plans.
• Williams, M (2001) Measuring E-Commerce - the ONS
  approach.
• Data sources
• UK National Statistics on e-commerce
• http//www.statistics.gov.uk/pdfdir/ecom1203.pdf
• US Census Bureau Estimated Quarterly U.S. Retail
  E-commerce Sales
• http//www.pdfcensus.gov/mrts/www/current.html

The Economics of
the Internet Guy Judge, February 2005
39
Key papers - Has 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

The Economics of
the Internet Guy Judge, February 2005
40
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.

The Economics of
the Internet Guy Judge, February 2005