nep-ict New Economics Papers
on Information and Communication Technologies
Issue of 2006‒11‒12
fourteen papers chosen by
Walter Frisch
University Vienna

  1. ICT Use in the Developing World: An Analysis of Differences in Computer and Internet Penetration By Menzie D. Chinn; Robert W. Fairlie
  2. Usage and Diffusion of Cellular Telephony, 1998-2004 By Michal Grajek; Tobias Kretschmer
  3. Heterogeneity and the Dynamics of Technology Adoption By Stephen Ryan; Catherine Tucker
  4. Paid Placement: Advertising and Search on the Internet By Yongmin Chen; Chuan He
  5. Pricing Digital Goods: Discontinuous Costs and Shared Infrastructure By Ke-Wei Huang; Arun Sundararajan
  6. Flexible Investment Decisions in the Telecommunications Industry: Case Applications using Real Options By Nicholas Economides
  7. Network Effects, Switching Costs, and Underlying Preferences in Operating Systems for Servers: A Case of Linux vs. Windows By Seung-Hyun Hong; Leonardo Rezende
  8. Bundling and Collusion on Communications Markets By Edmond Baranes
  9. Search Costs, Demand Structure and Long Tail in Electronic Markets: Theory and Evidence By Anindya Ghose; Bin Gu
  10. The Impact on Broadband Access to the Internet of the Dual Ownership of Telephone and Cable Networks By Pedro Pereira; Tiago Ribeiro
  11. What’s It To You? A Survey of Online Privacy Concerns and Risks By Janice Tsai; Lorrie Cranor; Alessandro Acquisti; Christina Fong
  12. Interconnection of Cable Networks: A Regulation Proposal for Broadband Internet Services By Leitao, Joao
  13. Geography and Electronic Commerce: Measuring Convenience, Selection, and Price By Chris Forman; Anindya Ghose; Avi Goldfarb
  14. On the Impact of Practical P2P Incentive Mechanisms on User Behavior By Kostas G. Anagnostakis; Fotios C. Harmantzis; Sotiris Ioannidis; Manaf Zghaibeh

  1. By: Menzie D. Chinn (University of Wisconsin, and NBER); Robert W. Fairlie (University of California, Santa Cruz)
    Abstract: Computer and Internet use, especially in developing countries, has expanded rapidly in recent years. Even in light of this expansion in technology adoption rates, penetration rates differ markedly between developed and developing countries and across developing countries. To identify the determinants of cross-country disparities in personal computer and Internet penetration, both currently and over time, we examine panel data for 161 countries over the 1999-2004 period. We explore the role of a comprehensive set of economic, demographic, infrastructure, institutional and financial factors in contributing to the global digital divide. We find evidence indicating that income, human capital, the youth dependency ratio, telephone density, legal quality and banking sector development are associated with technology penetration rates. Overall, the factors associated with computer and Internet penetration do not differ substantially between developed and developing countries. Estimates from Blinder-Oaxaca decompositions reveal that the main factors responsible for low rates of technology penetration rates in developing countries are disparities in income, telephone density, legal quality and human capital. In terms of dynamics, our results indicate fairly rapid reversion to long run equilibrium for Internet use, and somewhat slower reversion for computer use, particularly in developed economies. Financial development, either measured as bank lending or the value of stocks traded, is also important to the growth rate of Internet use.
    JEL: O30 L96
    Date: 2006–09
  2. By: Michal Grajek (Wissenschaftszentrum Berlin (WZB) and Humboldt University); Tobias Kretschmer (Institute for Communication Economics, University of Munich and Centre for Economic Performance, LSE)
    Abstract: In this paper, we study the dynamics of usage intensity of second-generation cellular telephony over the diffusion curve. We address two specific questions: First, does information about usage intensity over time allow us to draw conclusions about the underlying drivers of technology diffusion? Second, what effect does the existence and penetration of previous generations and other networks in the same generation on network usage intensity? Using an operator-level panel covering 41 countries with quarterly data over 6 years, we find that heterogeneity among adopters dominates network effects and that different technological generations are complements in terms of usage, but substitutes in terms of subscription.
    Keywords: Cellular telephony, diffusion, usage intensity, network effects, consumer heterogeneity, fixed-mobile substitutability
    JEL: L1 L52 O38
    Date: 2006–10
  3. By: Stephen Ryan (MIT and NBER); Catherine Tucker (MIT Sloan School of Business)
    Abstract: This paper analyzes the role of heterogeneity and forward-looking expectations in the diffusion of network technologies. Using a detailed dataset on the adoption of a new videoconferencing technology within a firm, we estimate a structural model of technology adoption and communications choice. We allow for heterogeneity in network benefits and adoption costs across agents. We find that ignoring heterogeneity in the interplay between adoption costs and network effects will underpredict the size of the steady-state network size by almost 50 percent. We develop a new “simulated sequence estimator” to measure the extent to which agents seek diversity in their calling behavior, and characterize the patterns of communication as a function of geography, job function, and rank within the firm. We find that agents have significant welfare gains from having access to a diverse network, and that a policy of strategically targeting the right subtype for initial adoption can lead to a faster-growing and larger network than a policy of uncoordinated or diffuse adoption.
    Date: 2006–10
  4. By: Yongmin Chen (University of Colorado at Boulder); Chuan He (University of Colorado at Boulder)
    Abstract: Paid placement, where advertisers bid payments to a search engine to have their products appear next to keyword search results, has emerged as a predominant form of advertising on the Internet. This paper studies a product-di¤erentiation model where consumers are initially uncertain about the desirability of and valuation for di¤erent sellers? products, and can learn about a seller?s product through a costly search. In equilibrium, a seller bids more for placement when his product is more relevant for a given keyword, and the paid placement of sellers by the search engine reveals information about the relevance of their products. This results in e¢ cient (sequential) search by consumers and increases total output.
    Keywords: Paid placement, Advertising, Auction, E-commerce, Search
    Date: 2006–09
  5. By: Ke-Wei Huang (Leonard N. Stern School of Business, New York University); Arun Sundararajan (Leonard N. Stern School of Business, New York University)
    Abstract: We develop and analyze a model of pricing for digital products with discontinuous supply functions. This characterizes a number of information technology-based products and services for which variable increases in demand are fulfilled by the addition of "blocks" of computing or network infrastructure. Examples include internet service, telephony, online trading, on-demand software, digital music, streamed video-on-demand and grid computing. These goods are often modeled as information goods with variable costs of zero, although their actual cost structure features a mixture of positive periodic fixed costs, and zero marginal costs. The pricing of such goods is further complicated by the fact that rapid advances in semiconductor and networking technology lead to sustained rapid declines in the cost of new infrastructure over time. Furthermore, this infrastructure is often shared across multiple goods and services in distinct markets. The main contribution of this paper is a general solution for the optimal nonlinear pricing of such digital goods and services. We show that this can be formulated as a finite series of more conventional constrained pricing problems. We then establish that the optimal nonlinear pricing schedule with discontinuous supply functions coincides with the solution to one specific constrained problem, reduce the former to a problem of identifying the optimal number of "blocks" of demand that the seller will fulfil under their optimal pricing schedule, and show how to identify this optimal number using a simple and intuitive rule (which is analogous to "balancing" the marginal revenue with average "marginal cost"). We discuss the extent to which using "information-goods" pricing schedules rather than those that are optimal reduce profits for sellers of digital goods. A first extension includes the rapidly declining infrastructure costs associated with Moore’s Law to provide insight into the relationship between the magnitude of cost declines, infrastructure planning and pricing strategy. A second extension examines multi-market pricing of a set of digital goods and services whose supply is fulfilled by a shared infrastructure. Our paper provides a new pricing model which is widely applicable to IT, network and electronic commerce products. It also makes an independent contribution to the theory of second-degree price discrimination, by providing the first solution of monopoly screening when costs are discontinuous, and when costs incurred can only be associated with the total demand fulfilled, rather than demand from individual customers.
    Keywords: digital goods, price discrimination, nonlinear pricing, screening, discontinuous costs, shared infrastructure, Moore’s Law
    JEL: D41 D82 L1
    Date: 2006–09
  6. By: Nicholas Economides (Stern School of Business, New York University)
    Abstract: This paper discusses how antitrust law and regulatory rules should be applied to network industries. In assessing the application of antitrust in network industries, we analyze a number of relevant features of network industries and the way in which antitrust law and regulatory rules can affect them. These relevant features include (among others) network effects, market structure, market share and profits inequality, choice of technical standards, relationship between the number of active firms and social benefits, existence of market power, leveraging of market power in complementary markets, and innovation races. We find that there are often significant differences on the effects of application of antitrust law in network and non-network industries.
    Keywords: networks, network effects, public policy, antitrust, telecommunications, technical standards, lock-in, net neutrality, Internet, Microsoft, Trinko
    JEL: L4 L5
    Date: 2006–09
  7. By: Seung-Hyun Hong (University of Illinois); Leonardo Rezende (PUC-Rio and University of Illinois)
    Abstract: We seek to investigate to what extent network effects and switching costs affect the decision to adopt Linux or Windows as the operating system for computer servers. To this end, we use detailed survey data of over 100,000 establishments in the United States. To account for unobserved preferences for either operating system, we employ recently developed dynamic discrete choice panel data methods (Arellano and Carrasco 2003). The results from our empirical analysis suggest that among network effects, switching costs, and unobserved preferences, the last two are important factors in the market for operating systems for servers. We find that switching costs are significant, but can be severely overestimated by methods that do not account for unobserved heterogeneity in establishment-specific tastes for operating systems. We also find that once taste heterogeneity is taken into account, network effects are not significant.
    Date: 2006–09
  8. By: Edmond Baranes (University of Montpellier)
    Abstract: In this paper we examine competition between a cable operator and a telecom operator on broadband Internet service access whereas the cable operator monopolizes a TV market. We investigate the impact of bundling on the sustainability of collusion in an infinitely repeated game framework. We show that the bundling strategy of the cable operator may hinder collusion. Futhermore, we consider a setting in which the cable operator enters the broadband Internet service market using a one-way access that the incumbent possesses. We then show that when the cable operator bundles its products, a low access charge may increase the feasibility of collusion. This main result may have an important policy implication.
    Keywords: Bindling, Collusion, Differentiation.
    JEL: D43 L13 L9
    Date: 2006–10
  9. By: Anindya Ghose (Stern School of Business, New York University); Bin Gu (McCombs School of Business, University of Texas at Austin)
    Abstract: It is well known that the Internet has significantly reduced consumers’ search costs online. But relatively little is known about how search costs affect consumer demand structure in online markets. In this paper, we identify the impact of search costs on firm competition and market structure by exploring a unique theoretical insight that search costs create a kink in aggregate demand when firms change prices. The significance of the kink reflects the magnitude of online search costs and the kinked demand function provides information on how search costs affect competition in the online market. Using a dataset collected from Amazon and Barnes & Noble, we find that search costs vary significantly across online retailers. Consumers face low search costs for price information from It leads to a higher price elasticity when the firm reduces prices than when it increases prices, increasing Amazon’s incentive to engage in price competition. On the other hand, consumers face relatively higher search costs for price information from Barnes & Noble. This leads to a lower price elasticity when Barnes & Noble reduces prices than when it increases prices, reducing Barnes & Noble’s incentive to engage in price competition. We also find that search costs decrease with the passage of time as the information about price changes dissipates among consumers, leading to increased price elasticity over time. Finally, we highlight that search costs are lower for popular books compared to rare and unpopular books. These findings have implications for the impact of the Internet on the Long Tail phenomenon.
    Keywords: Electronic Markets, Search Costs, Kinked Demand Curve, Price Elasticity, Price Competition, Long Tail
    Date: 2006–10
  10. By: Pedro Pereira (Autoridade da Concorrencia, Portugal); Tiago Ribeiro (Indera)
    Abstract: In Portugal, the telecommunications incumbent o®ers broadband access to the Inter- net, both through digital subscriber line and cable modem. In this article, we estimate the impact on broadband access to the Internet of the structural separation of these two businesses. We use a panel of consumer level data and a discrete choice model to estimate the price elasticities of demand and the marginal costs of broadband access to the Internet. Based on these estimates, we simulate the e®ect on prices and social welfare of the structural separation. Our results indicate that the structural separation would lead to substantial price reductions. For broadband clients, on average, each household would save 3:37 euros per month, or 14% of the current price levels. Overall, on average, each household would save 2:73 euros per month, or 14% of the current price levels. We test the robustness of our results in terms of: (i) the estimates of the demand elasticities, (ii) the strategic behavior of the ¯rms, and (iii) the market share estimates. There is no evidence of collusion.
    Keywords: Broadband, Structural Separation, Prices
    JEL: L25 L51 L96
    Date: 2006–08
  11. By: Janice Tsai (Carnegie Mellon University); Lorrie Cranor (Carnegie Mellon University); Alessandro Acquisti (Carnegie Mellon University); Christina Fong (Carnegie Mellon University)
    Abstract: Finding information about privacy practices can be difficult: privacy policies often do not present this information in an accessible way. People typically do not know how or for what purpose their personal information, gathered online, will be used. When asked, people frequently express concerns about their privacy, but their behavior often does not reflect their concerns. We conducted an online survey to examine participants’ online privacy concerns, focusing especially on the online shopping context. We asked participants about several scenarios related to the privacy of personal information. We found that Privacy Finder, a P3Penhanced search engine, provides information that addresses the scenarios that participants believe are most likely to occur. We also asked participants about a wide range of items for purchase online to evaluate which types of items are more likely to raise privacy concerns.
    Date: 2006–10
  12. By: Leitao, Joao
    Abstract: In this article a brief revision of the European and Portuguese Regulatory frameworks is made, especially in terms of the interconnection of broadband internet services that are offered by cable operators. A formalization with two cable networks is presented, in order to obtain a benchmark for symmetric networks, and two scenarios: collusion and regulated market; are developed. This justifies the implementation of regulatory policies, with the establishment of caps for the interconnection tariffs, in order to assure a larger penetration rate of the broadband internet services and a bigger total welfare.
    Keywords: Regulation; Tariffs of Interconnection; Goodwill.
    JEL: L51 D40
    Date: 2006–10–16
  13. By: Chris Forman (Tepper School of Business); Anindya Ghose (Stern School of Business, New York University); Avi Goldfarb (Rotman School of Management, University of Toronto)
    Abstract: We develop a formal model of online-offline substitution to identify three factors that drive consumers to purchase online: convenience, selection, and price. This model builds hypotheses on how features of offline retail supply impact online purchasing. We then examine how the local availability of offline retail options drives use of the online channel and consequently how the convenience, selection, and price advantages of the online channel may vary by geographic location. In particular, we examine the effect of local store openings on online book purchases in that location. We explore this problem using data from Amazon on the top selling books for 1501 unique locations in the US for 10 months ending in January 2006. In addition to this data, we use information on changes in local retail competition as measured by openings of large specialty bookstores such as Borders or Barnes & Noble and discount stores such as Wal-Mart or Target. We show that even controlling for product-specific preferences by location, changes in local retail options have substantial effects on online purchases. We demonstrate how the convenience, selection, and price benefits of the Internet are different for customers in different types of locations. More generally, we show that geography significantly impacts the benefit that consumers derive from electronic markets.
    Date: 2006–09
  14. By: Kostas G. Anagnostakis (Institute for Infocomm Research); Fotios C. Harmantzis (Stevens Institute of Technology); Sotiris Ioannidis (Stevens Institute of Technology); Manaf Zghaibeh (Stevens Institute of Technology)
    Abstract: In this paper we report on the results of a large-scale measurement study of two popular peer-topeer systems, namely BitTorrent and eMule, that use practical and lightweight incentive mechanisms to encourage cooperation between users. We focus on identifying the strategic behavior of users in response to those incentive mechanisms. Our results illustrate a gap between what system designers and researchers expect from users in reaction to an incentive mechanism, and how users react to those incentives. In particular, we observe that the majority of BitTorrent users appear to cooperate well, despite the existence of known ways to tamper with the incentive mechanism, users engaging in behavior that could be regarded as cheating comprised only around 10% of BitTorrent’s population. That is, although we know that users can easily cheat, they actually do not currently appear to cheat at a large enough scale. In the eMule system, we identify several distinct classes of users based on their behavior. A large fraction of users appears to perceive cooperation as a good strategy, and openly share all the files they obtained. Other users engage in more subtle strategic choices, by actively optimizing the number and types of files they share in order to improve their standing in eMule’s waiting queues; they tend to remove files for which downloading is complete and keep a limited total volume of files shared.
    Date: 2006–09

This nep-ict issue is ©2006 by Walter Frisch. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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