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date: 07 December 2019

(p. ix) Introduction

(p. ix) Introduction

Digitization—and the Internet—have transformed business and society in the past 15 years. The world's Internet-connected population has grown from essentially zero in 1995 to 2 billion today.1 The Internet and digitization have transformed many industries, including retailing, media, and entertainment products. Millions of people spend hours each day accessing and creating information online.

The firms of the digital economy not only affect the daily life of most people in industrialized countries, but they are also highly profitable. Once nearly left for dead, Apple was in 2011 the third most valuable company in the world, with a market valuation of almost $300 billion US, far above its new-economy forebears Microsoft, IBM, and AT&T at $239, $182, and $174, respectively. Rounding out the newer generation of digital firms are Google, valued at $192 billion, Amazon at $77 billion, Facebook at $83 billion, and eBay at $36 billion.2 While particular valuations fluctuate, it is clear that firms actively in the digital economy are now global players with market capitalizations exceeding those of long-established companies in more traditional industries.

New digitally enabled technologies have facilitated more extensive application of many business strategies that had formerly occupied the attention of economic theorists more than business practitioners. The practices include auctions, price discrimination, and product bundling. Although they have been employed for centuries, they are easier to utilize in digital contexts. Software operating on platforms has heightened the role of platform competition and network effects. The Internet has also provided a stage for many phenomena that would have been difficult for economists—or others—to imagine a few decades ago: large-scale sharing of digital material at sites such as YouTube, Facebook, and Wikipedia. Open-source software reflects related behaviors. Along with many new opportunities, the Internet has also brought some new threats. These include threats to businesses, such as piracy and the security of connected devices, as well as threats to individuals, such as privacy concerns.

These developments have prompted what is, by academic standards, a rapid outpouring of research. This volume is an attempt to describe that work to date, (p. x) with the goals of both explicating the state of the literature and pointing the way toward fruitful directions for future research. The book's chapters are presented in four sections corresponding four broad themes: (1) infrastructure, standards, and platforms; (2) the transformation of selling, encompassing both the transformation of traditional selling and new, widespread application of tools such as auctions; (3) user-generated content; and (4) threats in the new digital environment. No chapter is a prerequisite for another, and readers are encouraged to read in any order that aids digestion of the material. A guide to the chapters follows.

The first section deals with infrastructure, standards, and platform competition. In chapter 1, Shane Greenstein provides an overview on Internet infrastructure with a particular emphasis on Internet access and broadband development. There is an interdependence between infrastructure development and changes in industries that rely on this infrastructure. Thus, researchers investigating such industries need a proper understanding of Internet infrastructures. In chapter 2, Joseph Farrell and Timothy Simcoe discuss the economics of standardization, and describe the costs and benefits of alternative ways to achieve compatibility.

The section then turns to issues related to platform competition. The next chapters focus on a number of industries that heavily rely on recent developments in electronic data storage and transmission. In chapter 3, Andrei Hagiu provides a detailed view on developments in business strategies in the market of software platforms. He offers some rich institutional details on this important and rapidly changing industry. In chapter 4, Robin Lee provides a related analysis for the videogame industry. In chapter 5, Wilko Bolt and Sujit “Bob” Chakravorti survey the research on electronic payment systems. In chapter 6, Steffen Hoernig and Tomasso Valletti offer an overview on recent advances on the economics of mobile telephony. All these industries are characterized by mostly indirect network effects. Here, to understand the development of these industries, one has to understand the price and non-price strategies chosen by platform operators. Thus, an important part of the literature relates to the recent theory of two-sided markets. This theme will reappear in a number of other chapters in this handbook. Finally, in chapter 7, Bruno Jullien contributes to our understanding of B2B platforms, drawing on insights from the two-sided market literature. This theory-oriented chapter also helps in formalizing other platform markets.

The second section deals with the transformation of selling. The Internet has transformed selling in a variety of ways: the reduced costs of online retailing threatens offline retailers, widespread availability of information affects competition, digital technology allows the widespread employment of novel pricing strategies (bundling, price discrimination), and auctions are now seeing wide use. In chapter 8, Chad Syverson and Ethan Lieber focus on the interdependence between online and offline retailing. In chapter 9, Jose-Luis Moraga and Matthijs Wildenbeest survey the work on comparison sites. They develop a formal model that reproduces some of the insights of the literature.

Within the general topic of selling, the volume then turns to pricing practices. In chapter 10, Drew Fudenberg and Miguel Villas-Boas start with the observation (p. xi) that due to advances in information technology, firms have ever more detailed information about their prospective and previous customers. In particular, when firms have information about consumers’ past purchase decisions, they may use this information for price discrimination purposes. The focus of the chapter is on the effects of price discrimination that is based on more detailed customer information, both under monopoly and under competition. In chapter 11, Jay Pil Choi surveys the literature on product bundling. This survey focuses on the theory of product bundling and to which extent it is particularly relevant in the context of the digital economy.

The next two chapters address issues related to auctions. In chapter 12, Ben Greiner, Axel Ockenfels, and Abdolkarim Sadrieh provide an overview on Internet auctions. They review theoretical, empirical, and experimental contributions that address, in particular, bidding behavior in such auctions and the auction design in single-unit Internet auctions. In chapter 13, Luis Cabral surveys recent, mostly empirical work on reputation on the Internet, with a particular focus on eBay's reputation system.

The selling section concludes with a contribution on advertising. In chapter 14, Simon Anderson reports on recent developments in online advertising and offers a mostly theory-oriented survey on advertising on the Internet. In particular, he develops a logit model to address some of the most important issues, which draws on the two-sided market literature.

The third section of the book discusses the emergent phenomenon of user generated content on the Internet. In chapter 15, Lian Jian and Jeff MacKie Mason elaborate on user-generated content, an issue that had hardly arisen prior to the digital economy. In chapter 16, Sanjeev Goyal discusses the importance of the theory of social network for our understanding of certain features of the digital economy, in particular, the functioning of social networking sites such as Facebook. In contrast with the literature that postulates network effects in the aggregate, the literature on social networks takes the concrete structure of the network seriously and is concerned in particular with local interactions. In chapter 17, Justin Johnson elaborates on the economics of open source. Partly, open source is user-generated content. An important question concerns the generation of ideas, mostly as software products, with respect to the advantages and disadvantages of open source compared to traditional proprietary solutions. In this context, the openness of a product is also discussed.

The fourth section of the volume discusses threats arising from digitization and the Internet. Chapters 18 and 19 analyze digital piracy. In chapter 18, Paul Belleflamme and Martin Peitz survey the theoretical literature on digital piracy, whereas in chapter 19, Joel Waldfogel surveys the empirical literature. In chapter 20, Alessandro Acquisti and Laura Brandimarte introduce the important issue of privacy in the digital economy. In chapter 21, Ross Anderson and Tyler Moore survey the work on Internet security.

(p. xii) Notes

(1.) See Internet World Stats, at http://www.internetworldstats.com/stats.htm, last accessed June 10, 2011.

Notes:

(1.) See Internet World Stats, at http://www.internetworldstats.com/stats.htm, last accessed June 10, 2011.