1. Economics and Electronic Commerce

2. The Competitive Benchmark Firms are small, production processes are simple, inputs are readily available and not specialized to any specific firm’s production process. All goods --inputs and outputs -- are commodities. There is no branding or product differentiation. All markets are perfectly competitive. No firm’s individual production or procurement decisions affect market prices. No individual consumer’s purchases affect market prices.

3. Competitive Benchmark Cost curves are U-shaped, with constant returns to scale prevailing in the long-run. P=MC=min LRATC The competitive equilibrium is efficient: no reallocation of resources can make any individual better off without making someone else worse off.

4. The Contemporary Economic Landscape Firms are large, production is complex, inputs are specialized. Average cost declines, with significant increasing returns to scale. Firms enjoy significant market power: oligopoly. Extensive product differentiation and marketing.

5. The Imperatives of Technology Applications of technology require precise subdivision and coordination of activities. Large-scale subdivision generates complexity which must be comprehended and managed. Complexity extends production processes in time and space. –Spatial extension through the supply chain –Temporal extension through component fabrication and assembly

6. The Imperatives of Technology Microeconomic Consequences: –Large overhead costs. –Significant economies of scale and scope. –Multi-dimensional product characteristics. Consequences for Industrial Organization –Strategic rather than competitive environment. –Non-price competition (branding and product differentiation).

7. Information and the Economic Landscape What is the role of information in the economic landscape? The Hayek model: Competitive paradigm –Prices are sufficient statistics for information about the state of the market. –Competitive markets aggregate economic information. –Decentralized decision-making requires only prices as inputs to decision processes.

8. Information and the Economic Landscape Strategic distortions of the competitive model: –Information is internalized in the supply chain and through long-term contracting relationships between firms. –Market segmentation and price discrimination mask information content of prices. –Product differentiation fragments information. –Strategic interactions (pricing and marketing) entangle information through versioning and bundling decisions.

9. The Internet and the New Economy Information technology is simultaneously intensifying the strategic features of the economic landscape, while making it more competitive. –Strategic Intensification Greater scope for both B2B and B2C commercial interactions Tightening of existing supply chains through internet data transfer protocols Dis- and re-intermediation of consumer sales.

10. The Internet and the New Economy –Intensification of competition Digital goods and services are the most extreme examples of the technological imperative: All costs are fixed costs -- marginal cost is zero. Wide-spread adoption of information technology puts zero cost production (copying) capabilities in everyone’s hands. Wide-spread adoption of technology gives economic agents vastly expanded access to information about products and prices.

11. Plan For the Course We will focus first on digital goods and services, examining issues of –Pricing and Market Structure –Economics Rights Management –Externalities and Standards –Regulation Our methodology for examining these issues will involve real-time market experiments, analysis of economic models, and real world examples.

12. Plan for the Course Time permitting, we will then use the insights developed in this section to examine how the internet if affecting commerce more broadly, looking at issues of: –Search –Supply Chain Management –Intermediation –Demand Management