Economics of Information and Internet for Master Students (Winter Term 2016 – 2017) Description: This unit deals with the economics of the production and distribution of information goods on the Internet. We will analyse the production, pricing and distribution of products that are mainly informational in nature such as software and news. We will also study the structure and functioning of Internet-mediated markets as well as of models of production that are specific to the Internet. Lectures (2 hrs/week): 1. Information goods: pricing, bundling, versioning, sampling, reputation. 2. Models of consumer search for goods and information online. 3. Intermediation, network effects and platform competition. 4. Open source software and the collaborative production of information goods. Exercises (2 hrs/week): Exercises will focus on analysing specific aspects of the strategies of a range of Internet companies, as explained in recent published academic articles. Each student will be required to prepare one short 20 mn presentation of one article from the reading list. We will also solve a few formal models for concepts dealt with in the course. Recommended books 1. “Information Rules: A Strategic Guide to the Network Economy.” By Carl Shapiro and Hal Varian, 1999, Harvard Business School Press. (“Shapiro & Varian” hereafter) 2. “Matchmakers: The New Economics of Multisided Platforms.” By David Evans and Richard Schmalensee, 2016. Harvard Business Review Press. (“Evans & Schmalensee” hereafter) 3. “The Success of Open Source.” By Stefan Weber, 2004. Harvard University Press. (“Weber” hereafter) Evaluation: Final Exam: 90mn, mix of simple exercises and knowledge questions. Essay: 15 pages (pass or fail). 1 Language: Lectures and exercises will be in English, presentations and essays can be made and written in German. Dates & Locations: Lectures: Wednesday: 10:00 - 12:00, weekly (from 19.10.2016) Location: Raum 4.105, Gebäude Waldweg 26, Hochhaus: Waldweg 26 Exercises: Friday: 16:00 - 18:00, weekly (from 21.10.2016) Location: Raum 1.164, Gebäude Oeconomicum: Pl. d. Göttinger Sieben 3 Exam: Wednesday 15.02.2017 from 10.00 to 12.00 Uhr, Raum ZHG001 Outline: 1. Introduction, context, definitions, goals and structure of the course, assignment of exercises and presentations. a. 2. Ch. 1 Shapiro & Varian Definitions and issues with information goods Keywords: search, credence and experience goods. The issue with lemons 3. a. Nelson, P. (1970). Information and Consumer Behavior. Journal of Political Economy, 78(2), 311– 329. http://www.jstor.org/stable/1830691 b. Akerlof G.A. (1970). The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, The Quarterly Journal of Economics, 84(3), 488-500, http://www.jstor.org/stable/1879431 Pricing information goods Keywords: bundling, versioning, subscription vs. per-use fees. a. Ch. 2 and 3 Shapiro & Varian b. Varian, H. R. (1996). Differential Pricing and Efficiency. First Monday, 1(2). http://firstmonday.org/ojs/index.php/fm/article/view/473 2 c. 4. Bakos, Y., & Brynjolfsson, E. (1999). Bundling Information Goods: Pricing, Profits, and Efficiency. Management Science, 45(12), 1613–1630. http://www.jstor.org/stable/2634781. Marketing information goods Keywords: consumer search, the role of experts, recommendations, repeat buying, certification, guarantees, samples (demos), reputation. 5. a. Lizzeri, A. (1999). Information Revelation and Certification Intermediaries. The RAND Journal of Economics, 30(2), 214–231. http://doi.org/10.2307/2556078 b. Baye, M. R., & Morgan, J. (2001). Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets. American Economic Review, 91(3), 454–474. http://doi.org/10.1257/aer.91.3.454 c. Ellison, G., & Ellison, S. F. (2009). Search, Obfuscation, and Price Elasticities on the Internet. Econometrica, 77(2), 427–452. http://doi.org/10.3982/ECTA5708 d. Gaudeul A. (2010). Software marketing on the Internet: the use of samples and repositories, Economics of Innovation and New Technology, 19(3), pp. 259-281, http://dx.doi.org/10.1080/10438590802472572 Internet auctions and advertising Keywords: first price, second price auctions, winners’ curse, search engine placement 6. a. Steiglitz, K. (2007). “English and Vickrey Auctions”, Ch. 1 of “Snipers, Shills, and Sharks: eBay and Human Behavior”, http://press.princeton.edu/titles/8435.html b. Bajari, P., & Hortaçsu, A. (2004). Economic Insights from Internet Auctions. Journal of Economic Literature, 42(2), 457–486. http://doi.org/10.1257/0022051041409075 c. Athey, S., & Ellison, G. (2011). Position Auctions with Consumer Search. The Quarterly Journal of Economics, 126(3), 1213–1270. http://doi.org/10.1093/qje/qjr028 The “side issue” of information exploitation and privacy… Kewords: Consumer targeting, advertising, personalization, personal information a. Stigler, G. (1980). An Introduction to Privacy in Economics and Politics. The Journal of Legal Studies, 9(4), 623-644. http://www.jstor.org/stable/724174 3 7. b. Taylor, C. (2004). Consumer Privacy and the Market for Customer Information. The RAND Journal of Economics, 35(4), 631-650. http://www.jstor.org/stable/1593765 c. Acquisti, A., Taylor, C., & Wagman, L. (2016). The Economics of Privacy. Journal of Economic Literature, 54(2), 442–492. http://doi.org/10.1257/jel.54.2.442 Network goods Keywords: compatibility, critical mass, coordination, bandwagon effect, lock-in, winner takes all 8. a. Ch. 7 Shapiro & Varian b. Katz, M. L., & Shapiro, C. (1985). Network Externalities, Competition, and Compatibility. The American Economic Review, 75(3), 424–440. http://www.jstor.org/stable/1814809 c. Besen, S. M., & Farrell, J. (1994). Choosing How to Compete: Strategies and Tactics in Standardization. Journal of Economic Perspectives, 8(2), 117–131. http://doi.org/10.1257/jep.8.2.117 d. Shapiro, C., & Varian, H. R. (1999). The Art of Standards Wars. California Management Review, 41(2), 8–32. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=1671231&site=ehost-live e. The QWERTY myth. (1999, April). The Economist. http://www.economist.com/node/196071 f. Farrell, J., & Klemperer, P. (2007). Chapter 31 Coordination and Lock-In: Competition with Switching Costs and Network Effects. In M. A. and R. Porter (Ed.), Handbook of Industrial Organization (Vol. 3, pp. 1967–2072). Elsevier. http://www.sciencedirect.com/science/article/pii/S1573448X06030317 Two-sided markets Keywords: intermediaries, externalities, chicken and egg, divide and conquer, cross-subsidies a. Part 2, Evans and Schmalensee. b. Rochet, J.-C., & Tirole, J. (2003). Platform Competition in Two-Sided Markets. Journal of the European Economic Association, 1(4), 990–1029. http://doi.org/10.1162/154247603322493212 c. Jullien, B. (2011). Competition in Multi-sided Markets: Divide and Conquer. American Economic Journal: Microeconomics, 3(4), 186–220. http://doi.org/10.1257/mic.3.4.186 4 9. Online social network: development dynamics and management. Keywords: social media, blogging, private regulation, reciprocation, online communities, networking, filtering of information 10. a. Boyd, D. M., & Ellison, N. B. (2007). Social Network Sites: Definition, History, and Scholarship. Journal of Computer-Mediated Communication, 13(1), 210–230. http://doi.org/10.1111/j.10836101.2007.00393.x b. Raynes-Goldie, K. (2004): “Pulling sense out of todays’ informational chaos: LiveJournal as a site of knowledge creation and sharing,” First Monday, 9(12), http://dx.doi.org/10.5210/fm.v9i12.1194 c. Bacharach, M., & Board, O. (2002). The Quality of Information in Electronic Groups. Netnomics, 4(1), 73–97. http://doi.org/10.1023/A:1014970712376 d. Gaudeul A. and C. Giannetti (2013): The role of reciprocation in social network formation, with an application to LiveJournal, Social Networks, 35(3), pp. 317-330, http://dx.doi.org/10.1016/j.socnet.2013.03.003 Software design, development and licensing Keywords: public good, private development of public goods, copyright, interfaces, testing, documentation, interfaces, code re-use and maintenance 11. a. Ch. 1, Weber. b. Besen, S. M., & Raskind, L. J. (1991). An Introduction to the Law and Economics of Intellectual Property. The Journal of Economic Perspectives, 5(1), 3–27. http://www.jstor.org/stable/1942699 c. Varian, H. R. (1993). Economic incentives in software design. Computational Economics, 6(3–4), 201–217. http://doi.org/10.1007/BF01299175. Open-source development Keywords: copyleft, signalling, commons, free software, BSD license, GPL, proprietary, public domain a. Ch. 2 & 3, Weber. b. Raymond, E. S. (1998). The cathedral and the bazaar. First Monday, 3(2). http://firstmonday.org/ojs/index.php/fm/article/view/578 c. Benkler, Y. (2002). Coase’s Penguin, or, Linux and The Nature of the Firm. The Yale Law Journal, 112(3), 369–446. 5 12. d. Lerner, J., & Tirole, J. (2002). Some Simple Economics of Open Source. The Journal of Industrial Economics, 50(2), 197–234. http://doi.org/10.1111/1467-6451.00174 e. Johnson J.P. (2002). Open Source Software: Private Provision of a Public Good, Journal of Economics & Management Strategy, 11(4), 637–662, http://dx.doi.org/10.1111/j.14309134.2002.00637.x f. Gaudeul A. (2007). Do Open Source Developers Respond to Competition?: The LaTeX Case Study, Review of Network Economics, 6(2), 239-263, http://dx.doi.org/10.2202/1446-9022.1119 Wrap-up: What did we learn, what did we forget, and what didn’t we understand? 6