Economic Perspectives on the Internet is a report written by Alan E. Wiseman that was published by the Bureau of Economics Federal Trade Commission in July 2000. The book focuses on topics related to the prices for Internet access and prices for goods and services on the Web. In addition, the author analyses other economic issues on the electronic commerce, like network effects and taxation.
The objective of the author
Reading the book I identify that the main objective of the author is
to present a set of factors that should influence in the pricing methods
used for all the services and goods that are commercialized through the
Internet.
Since the author served as an economic research analyst with the Bureau
of Economics, Federal Trade Commission in 1999, the book may support the
official bureau in implementing pricing policies. However, as the author
states, the views expressed in the report are those of the author and do
not necessarily reflect the views of the Commission (v).
As the author indicates: “this report will serve as a roadmap of the
current terrain in Internet-related economic matters, as well as a framework
for future analysis”. “Further scholarship can only serve to enhance our
understanding of this new an exciting transactions medium, as well as (hopefully)
establishing some well-accepted principles that might help to guide government
antitrust authorities in the regulatory process, and to assist their efforts
in maintaining viable competition”.
The main points that the author is trying to get across
1. What is the Internet?
In the first part, the author defines the Internet as an open network and presents other definitions given by other authors. Then, he explains the history and origins of the Internet making an emphasis on the U.S. Government involvement in the evolution of the Internet. This part also provides a technical overview of the Internet infrastructure explaining how the information is transmitted through the Internet in small “packets” of approximately 200 bytes. That kind of transmission is allowed by using the TCP/IP protocol. In the Governances Structure part, the author remarks that no centralized authority governs the Internet.
2. Pricing of Access to the Internet
This second section of the book describes different pricing schemes
that could be applied for pricing access to the Internet and the transmission
of packets of information on the web:
- The flat pricing method, which is the most common method, allows
all packets be treated equally and does not make possible to provide those
users who could pay higher prices with a higher quality of service. “Flat
pricing essentially offers “best effort” service for all users”. However,
this equal treatment can cause inefficiencies such as congestion costs
and degradation in service quality because of the high congestion.
- The Auction Approach discussed by MacKie-Mason and Varian, proposes
a per-packet pricing mechanism that varies according to the congestion
level on the network. The access could be more expensive when the net has
more congestion.
- Static Priority Pricing, presented by Cocchi and others, is a model
that proposes to create different priority classes for the network (as
a function of expected delay) and have the users self-selected which priority
class they would prefer for the packets they send. To illustrate, the tolerance
for an e-mail delay is not the same as the tolerance for the delay in real-time
audio or video transmission.
- Dynamic Priority Pricing, presented by Gupta, Stahl and Whinston,
is a dynamic priority-pricing mechanism that, in theory, could be implemented
in a completely decentralized environment; it incorporates the preferences
of all relevant users and service providers: “In each period a user is
presented with a menu of options listing the relative prices for different
priority classes as a function of delay time or other qualities”.
- PMP Approach, presented by Odlyzko, is a model that assigns different
prices for access to each route. To do this, Odlyzko proposes to partition
the network into different, independent routes, and assign different prices
for access to each route.
Each of the last methods is focused in getting efficiency pricing the
access to Internet, but there are technical factors and other events that
do not really make viable any of those methods and all of them are subject
of more investigation and research.
3. Pricing of Goods and Services on the Internet
Internet is affecting traditional markets because it brings changes
in search costs, ease of information acquisition and reductions in the
need for conventional shelf space. Wiseman discusses four aspects of the
“e-marketplace” that differ from the traditional market. To do so, he provides
points of view of different researchers, like Bakos, Stahl, Bailey, Brynjolfsson
and Smith, Odlyzko, Shapiro and Varian and Bulow.
- Effects of Search Costs on Pricing Policies. Since all the users
on the Internet can get more information about the products that they need
easily, search costs are minimum. According to Wiseman: “Lower search costs
reduce the incentive to advertise”. The author states: “One might predict
that prices posted on the Web tend to be lower than in the physical world
because advertising costs, per capita, are far lower”. Sellers may use
this difference to define a strategy of pricing on the Web.
- Packaging and Pricing of Information Goods. “ The infrastructure
of the Internet greatly reduces the costs associated with both reproducing
and distributing information goods”. This ease of replication, and the
maintenance of the quality of copies of the original product, along with
the ease of altering information goods in such a manner as to “customize”
also generate new economic strategies such as bundling products.
- Prospects for Price Discrimination. Sellers also get a lot of information
about customer expectations using feedback on the Internet. Sellers can
adopt different strategies on providing the service or product with different
prices to different consumer groups.
- Future of Sales Assistance. In the traditional market the assistance
is important to exchange information between the customer and the seller
or between intermediaries with customers to better show the product. Those
aspects can be different now in the electronic market and can lead to “disintermediation”
strategy.
4. Network Effects and the Internet
Internet is a network of networks where users add value to it. The more
users are connected, the more benefits a user gets from it: more opportunities
to communicate with more people. Examples of success and failure stories
can be ATM’s and Betamax standard videotapes. This is the point where “network
externalities” is a valid concept. It refers to the advantages that users
get from services to other users just because they are part of the network.
- Network Effects and Technology Adoption. Companies that are in the
Internet can adopt technologies than can be more or less compatibles with
others. Depending on what technology they choose, network effects will
be greater or not. The book shows different theories of a technology adoption.
- Applications to the Internet. In this section, the author focuses
on the network properties on the Internet. He states that those developments
might warrant the attention of antitrust authorities in future years. “Antitrust
authorities need to address the issues of market definition and de facto
market power, realizing that the presence of a relatively small installed
base might make a given firm far more entrenched than they otherwise would
be, absent the presence of network effects”.
5. Internet Taxation
This part of the book analysis if the government should impose new taxes
upon Internet commerce.
- Legal and legislative History. Here the author describes how current
environment in which remote sales take place were defined. “The same standard
has been conventionally adopted for electronic commerce as facilitated
by the Internet”. From 1997 until now local governments, are considering
and advocating Internet-tax legislation.
- Current Research on Internet Taxation. Many researchers, including
Lukas, McLure, Goolsbee, Zittrain, Cline and Neubig perform a detailed
research in order to determine appropriate tax policies or differential
tax rates. This is also a topic for future research in the area.
Key contributions
The main contribution of the author is to develop a research on an actual
topic presenting questions that should be treated and studied on the Electronic
marketplace. The author provides information concerning economical issues.
That information is a result of many well-known researchers.
How are the ideas discussed in the book likely to affect you and your
career?
The ideas discussed in the book affect the pricing policies on the
Electronic market. Since my career is related to the management of Information
Technology, I may be working in a company where products and services that
are based on information have to get returns on investments. Even if it
is a non-for-profit the goods and services have a price. The pricing strategy
that any company may adopt, should consider all the ideas that Wiseman
presents: Pricing access, Pricing goods and services on the Internet,
Network Effects and the Internet taxation. In my country, Bolivia, these
topics were not really considered yet, but with the global economy; companies
of my country should adopt adequate prices and adequate strategy.
Other critiques of the book.
This book has not many other critiques published. In spite of this,
the book is recommended and cited by other researchers. As an example the
class 180.375 Economics of Electronic Commerce, in the Department of Economics
at Johns Hopkins University, recommends this book as one of the readings.
At the same time, this book was the basis for the book The Internet Economy:
Access, Taxes, and Market Structure by Alan E. Wiseman published in November
2000.
Does the topic deserve a book or could it be better stated in a shorter
piece?
The topic deserves even more than one book because the electronic market
does not have yet defined pricing models in the electronic commerce. For
instance, Internet taxation is a topic that still is being analyzed by
the U.S. Government this year and does not have a solution yet.
All the topics of the book are still subject of research. Actually,
this topic is the basis for our class IST619: Applied Economics for Information
Managers, but it is not used in that class.
Should this book or any part of it be required reading in this class?
Since the book is a report of many research jobs, it could be a very good source for the basic concepts of economic issues on the Internet. It helps to understand basic concepts like network effects, network externalities and new pricing methods for electronic commerce.
What portion of the book contains the core message?
The core message is the third part: Pricing of Goods and Services on the Internet. In this section, the author explains why the traditional economic models are not applicable in the electronic market place anymore and gives examples about those differences. For instance, sellers have to consider new strategies like bundling products or price discrimination to different consumer groups (for example communities). As the Internet grows and grows more users access to it and this information industry requires innovation and good pricing strategies.
Sources:
Syllabus of class 180.375: Economics of Electronic Commerce, in the
Department of Economics at Johns Hopkins University: http://www.econ.jhu.edu/People/Harrington/375.htm.
Alan E. Wiseman. Economic Perspectives on the Internet. Bureau or Economics
Federal Trade Commission. July, 2000.
Joy M. Reid. The Process of Composition. Second Edition. Prentice-Hall
1988.