01 Course Introduction

Aaron Schiff

ECON 204 2009

Staff

• Lecturer: Aaron Schiff– Office: OGG building room 660– Email: a.schiff@auckland.ac.nz– Office hours: Monday & Friday 2-3pm.– Note I am a part-time staff member and will not

be on campus all the time – make an appointment if you want to see me at other times.

• Tutor– Andrew Young

Coursework

• Assignments: 3 @ 5% each.

• Mid-semester test: 25%.– Covers first half of the course.– Date TBA [during week before mid-semester break].

• Final exam: 60%.

• No plussage.

Tutorials

• Weekly tutorials start from week 2.

• Go to any tutorial session that you like.

• Tutorial times:– TBA

• Questions and answers on Cecil.

Reading References

• Recommended reading:– The Economics of e-Commerce and the Internet by

Edward J. Deak.• Two copies on short loan, 658.84 D278• Good background, but too simple.

– Introduction to Industrial Organization by Luis Cabral• One copy on short loan, 338.6 C11• Nice explanations of many of the economic models that we

will use, but no Internet examples

• Other readings/notes posted on Cecil.

Lectures & Slides

• Slides contain the minimum amount of material that you are expected to know for each topic.

• Check for corrections and updates on the Cecil if you don’t come to class.

• Examples in slides– Detailed answers to examples in the slides will be done in class.– Brief answers to the examples in the slides will be available on

Cecil shortly before the mid-semester test and before the exam.

• Sometimes I write extra notes / explanations on the board in class. This is the “benefit” that you get for incurring the “cost” of showing up to class.

Mathematics• There is no official maths prerequisite for this course.

• However, it is impossible to do economics seriously without using some math.

• For this course you will need to know:– Basic algebra: Rearranging expressions, solving an equation,

factorising quadratics, etc.– How to draw and interpret graphs and calculate areas.

• If you have NO IDEA how to do these things or your math skills are very weak, you will probably find this course difficult, and you will have to work hard to pass.

Course Content

Weeks (approx)

Topic

1 Introduction to the Internet and economic modelling

2, 3, 4 Network effects, standards and platforms

5, 6 Intellectual property

7, 8, 9, 10 E-commerce and selling information goods

11 Online auctions

12 Asymmetric information, trust and reputation

The Internet and Economics

• What is the Internet?

• An economist’s answer:

The Internet is a technology that enables communication and dissemination of information in digital form.

• The Internet makes it much cheaper and easier to distribute (digital) information.

• New technologies often have large effects on existing firms and markets, as well as creating new markets and new ways of generating profits.– Other examples: Railways, airplanes, the telephone, genetics.

The Internet and Economics• Reduced cost of distributing information makes some businesses

much more viable, for example:– Auctions– Dating– Comparison shopping

• It also changes costs and efficiency of business functions related to information, e.g.:– Marketing– Pre/post-sales service– Internal communication & organisation– Get information about competitors

• And enables new information-based businesses:– Interactive maps (Google Earth)– Flickr

The Internet and Economics

• New technologies push out the production possibility frontier:

• Given the scarce resources that we have, new technology enables us to produce more “stuff”.

PPF

What is “Internet Economics”?

• The invention of the Internet did not fundamentally rewrite economic theory.

• “Internet economics” is mostly an application of existing economic knowledge and theories to new situations.

• Some modifications to our assumptions are required, and some new economic models are needed.

• But standard economic tools and techniques can be applied to understanding how Internet-related markets work.

• Don’t be disappointed – the basic economics that you have learned so far is actually useful!

Course Approach

• Try to keep things formal but understandable.

• All arguments based on some part of economic theory.

• We will use simple ‘models’.– Often have unrealistic assumptions.– A model captures an insight, but doesn't explain the whole

world.– “All models are wrong but some are useful”.

• An objective of this course is to give you experience using and understanding economic models.

• Assessment questions will reflect this approach.– Always answer with reference to theory / model.

Some Questions

• Have price comparison websites forced retailers to charge relatively similar prices?

• Why is there a single dominant online auction website (eBay) and a single dominant computer operating system (Windows)?

• When is it a good idea to sell something by auction?

• Why do buyers trust sellers in an online auction that they’ve never met before?

Some Questions

• Who are the winners and losers from music file sharing?

• Is DRM a good idea?

• Why do online job search websites allow a job-seeker to display her CV for free, but charge employers to place job advertisements?

• How can firms use the data they collect about e-commerce customers to increase profits?

Some Questions

• How can you make money by giving something away for free?

• How does e-commerce affect barriers to entry and competition in markets?

• Why do firms fight so hard to establish technical standards?

• Is open source good or bad for innovation in software?