3 credit hours
Thursday 7:10pm - 9:50pm, Constant Hall 1010
Officed Hours: Wednesday 10am - 12pm, Tuesday and Thursday 2pm - 4pm

This course is about the economics of e-commerce and the Internet. We will focus on the traditional variables that interest economists: output, price, product quality, service and conditions of sale, and competition among firms. Among the questions we will attempt to answer are the following:

• Is there a "new" economics that applies to the Net?
• Who are the winners and the losers?
• Does the Net lower (increase) prices and costs and under what circumstances?
• Do Net auctions decrease or increase prices paid?
• How many Net firms are making money? How many will survive?
• Does the Net increase or decrease the influence of product differentiation and branding?
• How are information goods different?
• What strategies can music and movie producers use to combat file-copying software such as KaZaA and Grokster? Are they likely to succeed?
• Do “pay to listen and/or download” music sites have a future?
• How do network economies (diseconomies) change things? I.e., when networks get bigger are they more or less efficient in terms of cost and performance?
• What is the economic import of data mining?
• Is the Net especially well suited for auctions? What are the strengths and weaknesses of Net auctions?
• How do shop bots change the economic arena?
• Does the Net provide the perfect stage for price discrimination?
• Are product quality and service improved or diminished by e-commerce?
• Does the Net produce downward sloping LRAC curves and, if so, what difference does this make?
• Does the Net typically generate economies of scale and scope?
• Do firms really compete differently when they use the Net rather than bricks and mortar outlets? Does the Net cause “free riding?”
• Is a "Bricks and Clicks" strategy an uneconomic form of cannibalization?

We are interested both in explaining economic behavior that we observe on the Internet and in e-commerce, and in predicting future developments. Those goals necessarily imply that we must judiciously rely upon economic theory and upon empirical evidence, some of which we will produce ourselves. To the surprise of some, there is a body of economic theory that directly relates to the Internet. Some portions of it----such as sunk costs, scale economies, the present value of alternative profit streams, the economics of price discrimination, and the economics of information are old and a bit hoary, but still very relevant. Other portions such as networking externalities and auction theory are more recent, but as we shall see, firmly inside the mainstream of economics.

Because the Internet and e-commerce are phenomena that one cannot usefully analyze without familiarity with them, we will frequently rely upon popular press reports from sources such as the Wall Street Journal and Business Week . The nature of the beast is that outlets such as these will reveal relevant facts and information long before the discipline’s best journals will. For, as a federal judge recently opined in an employment dispute, in the Internet world, a year is a lifetime. Since the lag between manuscript submission and publication often exceeds two years in a strong academic journal, by the time an Internet-oriented article appears, it may well be obsolescent. The rate of change is extremely high and last month’s news frequently has diminished usefulness. Hence, in the rapidly evolving world of the Internet, we will often find ourselves examining a breaking development and asking ourselves what it means. Fortunately, as you will see, basic economic principles continue to apply, albeit in a very different institutional context and in a less familiar mixture. The theory that we will utilize is much more settled than the empirical evidence that relates to the theory.