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Internet Economics + Regulating Technology I

Internet Economics + Regulating Technology I. Spring 2007 February 27. Today. Today. The emerging role of the Internet in economic growth Internet business models Regulating Internet infrastructure “Net Neutrality”. Markets are central to economic processes.

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Internet Economics + Regulating Technology I

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  1. Internet Economics +Regulating Technology I Spring 2007 February 27

  2. Today Today • The emerging role of the Internet in economic growth • Internet business models • Regulating Internet infrastructure • “Net Neutrality”

  3. Markets are central to economic processes

  4. When might we need government? Market failures: externalities, public goods, monopoly, imperfect information

  5. Economic Development 1.0 Technology Labor Capital Output

  6. Economic Development 2.0 Human capital Technology Labor Physical capital Output

  7. Economic Development 2.x Civic organizations & institutions Innovation & Productivity Governance Economic Development

  8. Economic Development –the Role of ICT Information Technology & Communication Civic organizations & institutions Innovation & Productivity Governance Economic Development

  9. Transactions Costs • Ronald Coase “The nature of the firm” 1937 • Transactions costs influence the structure of production, firms and markets • Transactions costs • Search costs and information costs • Bargaining and contracting costs • Policing and enforcement costs • Protecting trade secrets

  10. Institutions • Douglass North – the ‘rules of the game’ • Institutions reduce transactions costs • Institutions include the rule of law, property rights, social norms, …

  11. Anonymity LAW NORMS MARKET ARCHITECTURE

  12. Anonymity LAW NORMS MARKET ARCHITECTURE

  13. Anonymity LAW NORMS MARKET ARCHITECTURE

  14. What are the most important stories in Internet business and economics?

  15. Amazon eBay Google – Yahoo iTunes Wikipedia Craig’s list Outsourcing Syndication Aggregation Open source

  16. Internet = falling transactions costs Particularly for information services and knowledge Internet = lower costs of information How much is delivering new products and services and how much is displacing existing businesses? Are the institutions changing as well? New models or more competitive?

  17. Internet Business Models

  18. The Long Tail

  19. Long Tail • Sale of less popular products is now a larger part of total sales • Lower search costs = more available for more people • Lower inventory and distribution costs make it becomes profitable to sell a wider variety • Netflix vs. the video rental store • Amazon vs. the bookstore • What is the net result: new mega-corporations or support for small producers?

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  21. Friedman • The World is Flat • Supply chains that stretch across oceans • Outsourcing – technical support, software engineers, tax preparation, the presentation for your meeting, McDonald’s, JetBlue, and so on… • Globalization is here – deal with it

  22. Internet & Globalization • Internet has helped to spur on globalization • Cost of distributed production has dropped • Less need for locating labor close to product sales and servicing • Lower information costs create new production, trade and management alternatives • Effective aggregators of low cost producers • Technology transfer • Walmart & the supply chain

  23. Globalization II • Higher growth + economic development • Correlated with reduced job security • Disruption, uncertainty and adjustment costs • Decline in local economies • Winners and losers

  24. Market failures • Public goods • Imperfect information • Monopoly • Externalities - spillovers

  25. Network effects • Network effects = positive externalities = spillovers ~= public goods • Reed’s law – networks scale exponentially • Interoperability • Path dependency & lock-in • Barriers to entry and competition • Fax machine; IM; Windows; Wikipedia; markets

  26. Defining Public Goods

  27. Internet: Public or Private?

  28. Internet: Public or Private?

  29. Typology of Infrastructure

  30. Typology of Infrastructure

  31. Monopoly • Economies of scale • High fixed costs • Low variable costs • Falling costs of production • Choices: • Private production without regulation • Private production with regulation • Public production

  32. So what should we do about it? • Is there a role for government? • Telecommunications policy

  33. Three eras of communication: • Over-the-air • Localism, Diversity, Universalism • Cable • Relationship between cable and over-the-air • Internet • Innovation, competition, democracy

  34. Radio Act of 1927 SEC. 11. If upon examination of any application for a station license or for the renewal or modification of a station license the licensing authority shall determine that public interest, convenience, or necessity would be served by the granting thereof, it shall authorize the issuance, renewal, or modification thereof in accordance with said finding.

  35. Public Interest in the Broadcast Age • Trusteeship model with commercial broadcasters • Public Broadcasting Service and Corporation for Public Broadcasting • Public, Educational, Government (PEG) Access Channels

  36. A Fundamental Shift Scarcity to Competition

  37. Regulatory Failure (1982)

  38. Telecommunications Act of 1996 Deregulatory, in the hope of fostering competition

  39. Market Failure

  40. A Fundamental Shift One-to-Many to Many-to-Many

  41. Public Interest Media in the Internet Age “Today our problem is not making miracles--but managing miracles. We might well ponder a different question: What hath man wrought--and how will man use his inventions?”

  42. “Generativity”

  43. Rhetoric • “Neutrality” • “Discrimination” • Red Herrings and Straw Men

  44. Framers’ Intent? Bob Kahn: Network Neutrality is a dogmatic slogan that means: "nothing interesting can happen inside the net" Vint Cerf: On discriminatory techniques: “I’m worried that such a business model will seriously impair innovation in the network”

  45. Mapping the Neutrality Debate • The Telecom/Cable Position • How do we incentivize investment & innovation? • Antitrust (ex post) • A possible market-power oriented solution? • Regulation (ex ante) • Should we trust antitrust?

  46. “Four Internet Freedoms” consumers are entitled to… • access the lawful Internet content of their choice • run applications and services of their choice, subject to the needs of law enforcement • connect their choice of legal devices that do not harm the network • competition among network providers, application and service providers, and content providers (“Although the Commission did not adopt rules in this regard, it will incorporate these principles into its ongoing policymaking activities. All of these principles are subject to reasonable network management.”)

  47. Sample Legislation

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