The Economics of e-Commerce and the Internet.doc


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The Economics of e-Commerce and the Internet.doc

  1. 1. The Economics of e-Commerce and the Internet Edward J. Deak, Ph.D. Ch. 3 – Answers for Discussion and Review Questions 1. Identify and explain the significance of the technical and functional differences and interdependencies that exist between the Internet and the World Wide Web. The Internet is an electronic network of computer networks. It links individual computers together through their different networks. It is a message-based communications system allowing the transfer of text and data, voice and images. The transfer of e-mail is one common use of the Internet. The World Wide Web is another common application that utilizes Internet technology. It is an information-based system whose purpose is to organize and manage facts, allowing quick and easy access to that information from one site to another. It is driven by a browser technology based upon simple language commands and a system of hyperlinks. The Internet existed for 20 years prior to the introduction of the World Wide Web. However, the significance of the latter is that it gave average users easy access to the Internet, while greatly multiplying the number of interesting things that might be accomplished via the electronic interconnection system. 2. Initially, the United State government funded the research, development and operation of the Internet. Would funding from the private sector have been as efficient or even better as an incubator source for the Internet? Why? Entrepreneurial investment by the private sector is driven by the profit motive, while the U.S. government was motivated to fund the Internet by the desire to find a more secure communications system that would enhance the level of national defense. Given the high risks associated with the possible failure of new technology and the absence of an obvious early commercial application, it is unlikely that the private sector would have developed the Internet, or at least as rapidly as the governmental sector did. 3. The initial development of the World Wide Web was undertaken primarily by private research and commercial enterprises. Was this source the most efficient support for the Web? Why? The Web first appeared as the result of individual effort designed to solve an information management problem. Initially the Web was an open and trusting system where commercial entrepreneurs saw a profit potential. The Web has grown globally and rapidly as an information and commercial entity based upon the highly diverse efforts, motives and skills of millions of participants. Given that economic efficiency means acquiring output at the lowest resource cost or the Deak e-Commerce Ch. 3 Answers, Page 1
  2. 2. achievement of maximum output at a given level of resource expenditure, private development of the Web was most likely the most efficient route. Note that economic efficiency and markets offer no judgment about the moral, ethical or distributional consequences of the final result. The existence of Spam, cybersex, e-gambling and other unregulated uses of the Web may led some observers to legitimately question the value of private development. 4. How did Moore’s Law and the economics of chip making combine to speed the spread of personal computers, as well as the urge to connect to the Internet and Web? Moore’s Law postulates that technology will allow the number of transistors on a silicon computer chip to double every 18 months. Abiding by this law effectively doubles the computing power of a desktop or laptop computer every 18 months. The economics of chip making combined economies of scale with efficiencies associated with the learning curve to substantially reduced the manufacturing costs of producing increasingly more powerful computer chips. Together these forces simultaneously reduced the cost and expanded the power of personal computers, allowing more users to have cheaper access to the Internet and to do an ever-increasing number of interesting things on the Web. 5. How did the Web reinforce the spread of personal computers? At first, personal computers were mostly used as business machines serving as more efficient, stand along substitutes for typewrites and calculators. The ability to “surf the Web” gave non-business persons an attractive application and a reason for owning and using a personal computer. 6. How does the technology of a computer network expand upon and improve the economics of a television network? What characteristics of a network help to make the Web such a valuable vehicle for conducting e-commerce transactions? The economics of a television network such as NBC, ABC or CBS involves broadcasting a program such as CSI or Friends on a fixed date and time by linking together a collection of local affiliates. Fans of a particular program must adjust their personal schedule to fit the broadcasting schedule of the TV network. A computer network is more flexible and allows contact with an entertainment or commercial site at the convenience of the viewer. It is comparable to the video- on-demand service that is becoming available on many cable TV systems. The movie starts when you want it to start. A computer network is valuable for e- commerce because it is available 24/7 whenever the customer would like to purchase an item or gain some information. 7. What is the last mile problem? How does this problem affect the spread of e- commerce and the profitability of Internet infrastructure investments? Deak e-Commerce Ch. 3 Answers, Page 2
  3. 3. The last mile problem is that while Internet information is carried over fiber-optic cables at the speed of light, the final connection to the home or business is often made using older and much slower copper wire telephone lines. This limits the speed at which signals can be exchanged and lengthens the amount of time needed to fully transmit a complete signal such as a movie file or animated video game. This last mile based speed and time barrier limits the range of activity that can be transmitted over the Internet and discourages larger investments in Internet infrastructure until the problem can be solve. Speedier broadband cable and telephone DSL links help to overcome parts but not all of the last mile problem. 8. Refer to the capital and labor example that illustrates the cost-minimization rule. If the sample numbers hold for the extra worker, why would any firm wish to ever employ an extra unit of capital? [Hint: Return to Chapter 2 and the discussion of diminishing marginal returns to find the answer to this question.] In the short-run, both capital and labor are subject to the Law of Diminishing Marginal Returns. For the next extra worker the cost per unit of added output is greater than that of an extra unit of capital. However, if an added worker after that is hired the marginal product of the second added worker will decline given that the person is working with a fixed amount of capital. Even if the per unit labor cost shown in the denominator doesn’t increase, eventually diminishing returns shown in the numerator will fall low enough to encourage the firm to add an extra unit of capital rather than one more worker. 9. State the cost-minimizing rule. Explain how this rule helps to resolve the fiber optic research tension. The cost-minimizing rule states that the profit maximizing firm should hire resources such that: Marginal Product of Resource A = Marginal Product of Resource B Marginal Cost of Resource A Marginal Cost of Resource B The fiber optic research tension pits the cost of increasing the volume and speed of data flow over each wavelength of light against the cost of a research agenda focusing on increasing the number of wavelengths with each carrying more data but at a slower speed. Using the cost-minimizing rule to adjust the incremental output from each strategy by the added cost of achieving the output should help to yield the correct answer to the problem. 10. How does competition in product diversity usually affect the efficiency of the marketplace? Does this conclusion necessarily hold true for the technical diversity of cell phone connection standards in the United States? Why? Product diversity in the marketplace usually provides added benefits to the consumer. Product diversity allows buyers to better tailor their purchases to Deak e-Commerce Ch. 3 Answers, Page 3
  4. 4. individual tastes and preferences. However, diversity among technical cell phone standards may be valuable only up to the point where one standard is proved to be superior to the others. At this point, the winner is adopted as a universal standard allowing smoother, cheaper and more efficient communications among all parties. The adoption or competitive triumph of a universal standard has not happened a yet in the U.S. Therefore, national usage, research and product development tend to lag behind other nations where a universal standard has been determined. Having universal standard breeds system wide economies of scale and interoperability that are lagging in the U.S. 11. How does the diversity of cell phone connection standards in the United States affect the global competitive position of United States wireless service providers? The U.S. is a big cell phone market. However, with multiple connection standards, infrastructure investments are duplicated and phone manufacturers do not obtain the same economies of scale that are found in Europe or Asian markets. Research and the adoption of new products have been somewhat hindered to date by the diversity of U.S. standards. U.S. firms are not the undisputed leaders in world cell phone technology and phone manufacturing that their skills might otherwise allow them to be. With standardized cell phone technology, Europe or Japan may have a head start on the U.S. allowing them to establish the next generation of standards, products and jobs associated with more advanced cell phone service. 12. Distinguish between 1G, 2G and 3G in terms of wireless telephone services. 1G, or first generation wireless service, was the original analog cell connection providing just the voice connection. 2G service, is generally the cell service that is available today, which combines voice with limited messaging via the alpha numeric characters on the phone screen. Internet interconnection is possible with this system but transmission speeds are slow, costly and complicated by the existence of multiple connection standards. 3G service involves high speed Internet connections via cell phone technology. This service requires the purchase and introduction of additional bandwidth in the radio spectrum and has proven to be very expensive for both U.S. and European phone firms to acquire as well as to introduce. 13. What are the obstacles to the expansion of 3G cell phone service in the United States? First, there are competing multiple connection standards that raise the cost of introducing 3G in the U.S. Second, the service requires the purchase of expensive additional frequencies in the radio spectrum. Third, there is no guarantee that consumers will want to access the Internet via cell phones. Lastly, there is a competing technology called Wi-Fi that allows cheaper short-range Internet connections for laptops and other hand held devices. Deak e-Commerce Ch. 3 Answers, Page 4
  5. 5. 14. Assume for the moment that you are the chief executive of a major wireless phone company such as AT&T Wireless. What conditions or characteristics might make the delivery of 3G wireless Internet service via cell phones more popular? What might you do to enhance the number of 3G subscribers? Service price is always an important characteristic. The key is to get large numbers of people to use the service and thereby spread the fixed infrastructure charges over many customers, thereby reducing the cost of service per person. Having interesting applications such as the ability to transmit pictures, or send instant messages, might stimulate demand. Lastly, making the service as easy to use as possible would allow more persons of average technical skill to operate and benefit from the service. 15. What might be the economic worth of the Web to Berners-Lee if he had decided to patent the technology and code? Would the growth of the Web have been so rapid if it was a patented product for sale? Why would someone give away such a valuable idea? Why do thousand of people participate, for free, in the various @home computer search projects? DOS and Windows have made Bill Gates, the principle owner of Microsoft, the richest person in the world with an estimated net worth of some $46 billion. The proprietary economic value of the Web could rival or exceed the value of Windows. However, as a proprietary property, the spread of the Web might not have been as rapid or might have spawned competing systems. Tim Berners-Lee might be called an altruist, or a person who does things for the good of others, rather than for self-interest. It was his view that the Web should be both open and free in the monetary as well as the intellectual sense. Berners-Lee has steadfastly fought for openness and dedicated his later contributions to the Web in ways that are consistent with this view. People who participate for free in @home computer search projects are also altruists, who get their reward not from money, but from a sense of helping others and advancing the frontiers of scientific knowledge. Deak e-Commerce Ch. 3 Answers, Page 5