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.
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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.
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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.
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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.
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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:
https://drive.google.com/folderview?id=0B1wuZnSZlR_4ZjBTM2RmdS1lUGM&usp=sharing
