Friday, 10 August 2018

The Economics of digital technology, WHAT TO READ

The Economist, Prevent excessive concentration online, 28 June 2018

This is an article from this week's Economist about the ways to reduce concentration in digital markets. We will chat about this article during Thursday.

Hess and Ostrom, Overview of the Knowledge

This is an easy to read introduction about commons. I will read in class -- time permitting -- pages 4 and 5 (brief history), 7 (common-pool principles), 9 (the table on types of goods), 10 and 11 (the tragicomedy of the commons).

Rochet and Tirole, 2003

This paper started a rich stream of research about the Economics of platforms. We will read the introduction, the results on page 1013 and the mini-cases on operating systems and video games.

Katz and Shapiro, Network Externalities, 1985

We will read in class the first few pages (424 to some of 426) to see the basic reasons for network externalities and the final page (439) the summarizes the results and is starting to look at public policy issues. We will skip the actual model.

Malone, Yates, Benjamin, The Logic of Electronic

Short and clear, the only paper in this collection not coming from an Economics journal. A 1989 paper that uses Transaction Cost Economics to predict electronic commerce.


We will read just a few sentences from this paper -- the highlighted text explains the deeper reasons for transaction costs.


This paper from 1937 is the basis for Transaction Cost Economics -- an economic theory that has been used to predict electronic commerce. We will read the highlighted paragraphs of sections I and II.

Roth and Sotomayor, Two Sided Matching

Fama (the previous paper) shows us that markets are efficient by changing prices to reflect immediately all available information (the strong version of his efficiency hypothesis). But what about information in markets that do not have prices? One such market is the market for medical internships in the US. The matching between hospitals and medical graduates is a famous example of market matching and an opportunity to have a little bit of behavioral Economics in this list of papers. I will read in the class the first few pages of this paper and will give one simple example of truth-inducing mechanisms, second price bidding as described on pages 519-20.

Run-A-Match, 2016

Just an example of matching hospitals and medical graduates, to make the Roth and Sotomayor paper (4b) clearer.

Fama, Efficient Capital Markets, 1970

I am going to just browse through this complex paper, mostly on the highlighted paragraphs. The ideas are very important -- how information is central to markets and sets prices, but testing these ideas scientifically is, at least, difficult, some say impossible. A nice current summary of the ideas is offered by the UK Open University at

Spence, Signaling, 2002

I will read in class very little of this long paper -- from page 436 right hand side column to page 438 the end of the left hand side column. So, here we will discuss the simple algebraic models, at least the first two.


I will read in class the highlighted paragraphs and will skip the algebraic model, as I prefer the modelling of the Spence paper

Wednesday, 22 March 2017

An insightful commentary on the ACA and AHCA

See the post by David Blumenthal and Sara Collins on
Consider in light of Akerlof's theoretical insights into markets, uncertainty, and information asymmetry.

Saturday, 23 July 2016

Popular Economics Books

I hope that you have learned some new ideas during the first week of the Economics of ICT and digital markets. These ideas will be further developed and made more practical during the second week of the module. 

If you wish to read more about Economics, in particular about recent Economics scholarship, reading some of the following popular books may be a good way to do so:

The Matchmakers: The New Economics of Multisided Platforms by David Evans and Richard Schmalensee, 2016 

Who Gets What - And Why: Understand the Choices You Have, Improve the Choices You Make by Alvin Roth, 2016

Thinking, Fast and Slow by Daniel Kahneman, 2012

23 Things They Don't Tell You About Capitalism by Ha-Joon Chang, 2011

Freakonomics by Steven Levitt and Stephen Dubner, 2006

Information Rules: A Strategic Guide to the Network Economy by Carl Shapiro and Hal Varian, 1998

Co-Opetition by Adam Brandenburger and Barry Nalebuff, 1997


Another way to keep familiarizing yourself with academic economic thinking is to follow the weekly Free Exchange blog at the Economist:

By the way, I see that this week the Economist dedicates its seminal economic ideas piece to Akerlof's paper:

Thursday, 14 July 2016

First Week Plan and Papers

The goal of this module is to develop an understanding of the economic aspects of ICT and of digital markets. The module tries to balance theoretical ideas and practical implications by dedicating the first week to ideas and the second week mostly to implications.

Week 1 will be taught by reading in class parts of the fundamental papers about the economic aspects of ICT.  I’ve selected ten papers that cover three subjects -- information, transaction cost and externalities.The following paragaphs describe the papers very briefly and my plan what to discuss. At the bottom of the post there is a link to the ten papers.


On information, we will read first The Market for Lemons by Akerlof which introduces the idea of information asymmetry and its economic implications. We will read in detail only the basic model – pages 489 to 492. I am interested mostly in the idea, so the algebraic modelling will be only covered briefly. Akerlof teaches now at Georgetown University in Washington DC. In this case, a little bit of gossip is necessary -- George Akerlof's wife, Janet Yellen, is the chairperson of the USA federal bank!

The second paper about information is Spence’s 2002 paper Signalling in Retrospect. We will go through the very basic model on pages 436 to 439. I prefer this paper to Spence’s original Job Market Signalling paper from 1973, because the basic model is presented so elegantly. It has also some interesting developments of the basic model which we will discuss only briefly. Akerlof and Spence received the 2001 Nobel Prize in Economics (with Stiglitz).  I hope that we will be able to read these two papers during Monday.

The third paper about information is Eugene Fama’s 1969 paper about Efficient Capital Markets. I prefer this paper to Fama’s original papers from the early 1960 while he worked on his dissertation at the University of Chicago. Fama was awarded the Nobel Prize in Economics in 2013 (with Schiller and Hansen). The paper is complex and we will read only a few paragraphs that I highlighted. Fama’s ideas are less popular nowadays because they were undermined by recent Behavioural Economics research. However, I think that Fama’s thinking about the informational efficiency of markets is useful when you think about ICT. 

The final paper about information is about markets that do not clear on price. I’ve selected a review chapter by Roth and Sotomayor called Two-Sided Matching (from 1992). We will be mostly interested in the empirical example they give – the matching of medical students with hospitals in the USA – a market that clears on information. I hope also to read together the simplest model described in this paper – the marriage model. Roth teaches at Stanford; he received the Nobel Prize in Economics in 2012 with Shapley. His work is an interesting combination of game theory and experimental research.  I hope to read the Fama and the Roth papers during Tuesday.
During Week 2 many of the ideas about the economics Information will be discussed in more current and practical contexts. For example, signalling in electronic commerce or matching in Google’s keyword auctions.


The second aspect of Economics we will discuss during week 1 is transaction cost, namely the cost of accessing the market. Why I suggest that transaction cost is so important for ICT? Are other types of cost – manufacturing cost, labour cost, switching costs, etc. – less important? All these costs are important and indeed ICT influences them in important ways. However, economists think that a major result of ICT is the reduction in transaction costs and that reduction results in major changes of the ways economics activity is organized.

We will start with the 1937 paper by Coase – The Nature of the Firm – where the idea of transaction costs was first formalized and its effect on economic organization was suggested. The paper is also a good example for economic research that does not use mathematical modelling. Coase died in 2013 at the age of 102 and most of his life taught at the University of Chicago Law School; he received the 1991 Noble Prize in Economics.

The second paper about transaction cost is Williamson’s 1973 paper on Markets and Hierarchies. I’ve selected this simple paper to get an impression about Transaction Cost Economics development into a full blown theory. These ideas are very relevant to ICT mostly because information systems tend to ‘hold up’ its customers. Williamson teaches at the University of California, Berkley and received the 2009 Nobel Prize in Economics.

The third paper for this subject is the famous 1989 electronic markets hypothesis by Malone, Yates and Benjamin.  I think that this simple hypothesis is one of the most impressive predictions in social science. Today it seems obvious, but these MIT scholars used Transaction Cost Economist to predict the pervasiveness of electronic markets ten years before, say, eBay. I hope that we read these three papers during Wednesday.

The ideas about transaction cost will return in Week 2 with detailed discussion of the role of user expectations, coordination, and switching costs. Example will include keyboards, operating systems, and media standards.


The third subject we will discuss during Week 1 is externalities. The fact that network externalities (or network effects) appear in communication hardware and software makes this subject important. We will start the idea of externalities and the Coase theorem first.  Then we will read Katz and Shapiro’s 1985 paper Network Externalities, Competition and Compatibility. We will read only the non-technical parts of the paper (see the highlights). I am interested in the idea that markets with externalities are difficult to predict because there are multiple possible equilibria that are related to user expectations.

The second paper for this subject is one of the first to take a platform approach to the economic study of digital markets. We will read Rochet and Tirole’s 2003 paper about Platform competition in two-sided markets. We will read only the introduction and the summary of this very complex paper. Rochet and Tirole teach at the University of Toulouse; Tirole received the 2014 Noble Prize in Economics. The long technical part of the paper is typical of Tirole’s work on industrial organization and I will describe it briefly – do not attempt to read it :)  I hope to read these two papers during Thursday.

The third and final paper is by Hess and Ostrom. It is their introduction chapter to a 2007 book about Knowledge Commons. Ostrom researched common pool resources like forests, fisheries and grazing land. All these resources are subject to externalities. Ostron received the 2009 Noble Prize in Economics; she died in 2012. This chapter generalizes Ostrom’s work to knowledge resources. I plan to read this paper on Friday.

During week 2, we will discuss these subjects in a more practical context. We will give more details about platform types and many platform example. We will discuss standard and open source as important examples of Commons.


So, this is what I hope to achieve during Week 1. I hope that you will bring with you copies of the ten papers. I think that physical copies are better than electronic copies, because it is easier to add comments, but this is only my own personal taste. I expect students to browse through the papers before the class. I guess that it will be useful to read the introductions. During the lessons, we will read the papers together and discuss the ideas. There are no slides for Week 1.

The exam will be written after we teach in order to reflect well the material we actually discuss in class. The main goal of the exam – with respect to Week 1 – is to make you read again and think about papers and the ideas. The exam is not expected to be difficult or technical.

The papers are on Blackboard and below:

Monday, 20 June 2016

Class overheads for the second week

Dear students,
My class overheads are available on the link below.
(and also in Blackboard)
Best wishes,

Friday, 4 March 2016

The power of bundling, doesn't always benefit the consumer

In this article on the FT (; yes a bundle of goods or services can make the problem of selection easier for consumers, but when we start having to deal with selecting between bundles, when the same operator offers more than one bundle, and competitors likewise offer a choice of bundles, the consumer can become even more confused.

Add versioning into the mix and the problem becomes unmanageable.

Read up...
More isn't always better (HBR blog)
And a very long (72 pages) article "Complexity and Smart Nudges with Inattentive Consumers": In an experiment on markets for services, we find that consumers are likely to stick to defaults and achieve suboptimal outcomes...