It is the (Web) economy, stupid!the “promise land” is maturing

NTUA, MBA in techno-economics Athens, 25/11/2011

Michalis Vafopoulosvafopoulos.org

The question

Which are the main aspects of the Web economy?

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It is the economy, stupid!

How long takes to have 50 million users?• 38 years for telephone • 13 years for television • 4 years for Internet • 3 years for iPod• 2 years for Facebook• <1 year for Google +• ???

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Main issues① Web and economics & the Web Science

perspective② Goods in the Web③ Users④ Consumption and Production in the Web⑤ Economic modeling of Web Goods⑥ Market regulation and antitrust issues⑦ Web-based development

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the Web Science perspective① Internet economics: the predecessor ② Partial analysis of the Web economy ③ e.g. network economics, digital goods etc.④ Mainly focus on business implications⑤ Issues: Auctions, e-commerce, search engines

⑥ Lately, net neutrality & excessive market power⑦ Web science perspective– Standalone artifact– Actor-Networks Theory– How the Web transforms economy and

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Goods in the Web① Data, information, knowledge (+

Wisdom/Ethics)② Information goods③ Knowledge goods④ Digital goods

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Information goods: definitions

Definition Ithe good, which main market value emanates from the information it contains.

Definition IIanything that can be digitized (Varian)

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Information goods: characteristics

• high fixed cost of production• low marginal cost of reproduction• increasing returns to scale• experience good• public or a private good• non-rival and sometimes non-excludable

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Information goods: issues

• Versioning (e.g. s/w) • Bundling (e.g. MS office, Google?) • Pricing (e.g. discrimination)

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Knowledge goodsexogenous or endogenous inputs in production as: ① know-what (facts)② know-why (scientific knowledge)③ know-how (skills)④ know- who (networks)

1, 2 easily reproducible3, 4 not easily reproducible4 more important in the Web era

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Digital goodsBits with economic value, which are:

① nonrival ② infinitely expansible ③ (Initially) discrete or indivisible④ aspatial⑤ recombinant

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Externality① analyzes the impact that individual

decision-making has on the other agents② comparison of how decision-making

involves others without exchange③ Positive (i.e. education) or④ Negative (i.e. profiling)

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Network externalityNetwork externality:

① Some goods/services create more value when more users consume the same goods and services

② They have little or even no value if they are used in isolation (e.g. telephony)

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Types of network externalities

① Direct (e.g. mobile phones)② Indirect (e.g. mobile phone accessories)③ Two-sided network effects (or multi-

sided platforms) (e.g. hardware-software platforms and the Google’s advertising platform)

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Issues in network markets

Network monopoly (e.g. Microsoft, Google)Possible regulatory policies:

① Divestiture of the monopoly into separate firms.

② Unbundling or wholesale access to incumbent’s facilities (e.g. Internet explorer).

③ Licensing of proprietary interfaces to potentially competing platforms.

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Network externalities in the Web

Source of externalities =linking ① Web 1.0: documents (demand)② Web 2.0: Users (supply)③ Web 3.0: structured data (dem. +

supply?)Linked Data • bidirectional and massively

processable interconnections among online data

• enabler for existing infrastructures 16

Network externalities in the Web

Negative: • lack of trust • security,• identity theft • clickjacking • spamndexing• …

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Web Goods: definitionExisting approaches fail to both capture the digital and the network dimension (aka virtualization)

Web Goods are sequences of binary digits, identified by their assigned URI and affect the utility of or the payoff to some individual in the economy.

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Web GoodsTheir market value stems from the digital information they are composed from and a specific part of it, the hyperlinks, which link resources and facilitate navigation over a network of Web Goods.

(homework (+1): Find inferior, luxury, Giffen etc.Assumptions: income=time consumed onlinePrice: time per bit of information in a WG) 19

Web Goods: categories• Pure: basically exchanged and

consumed in the Web and are not tightly connected to an ordinary good or a service (pre-) existing in the physical world.

• Non pure (e.g. car’s photo in the Web)

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Web Goods: categories• commercial (e.g. sponsored search

results)• non-commercial (e.g. Wikipedia entries)

----• public (e.g. Linked Open Data) • private (e.g. subscription to online

magazine)– financial fee – “personal data” fee – “social” or “membership” fee

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Web Goods vs. Digital Goods• restricts non-rivalry and infinite

expansibility (concurrency capacity) • initially discrete and indivisible, but • Web 2.0: micro-chunks consumption• easily edit, interconnect, aggregate

and comment • extends aspatiality and atemporality

from local (e.g. personal HD) to global level (e.g. downloadable file link)

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Web Goods as commoditiesinformation and knowledge:multiple and controversial definitions

Web Goods: qualify as commodities (Debreu, 1959)

• stable identity (URI) • completely specified physically • temporally and spatially (reside

physically in a Web server during a specific period of time)

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Web Goods and the others…

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Web users

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Web economy

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Consumption & Production in the Web

Existing literature: the Web will lower prices because:

① lower search and fixed costs ② less product differentiation (e.g. location is less

important)③ “frictionless commerce”

Actually: no much evidence

The real transformation:More choices with less transaction costs in

production and consumption.

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Consumption in the Web

① More energetic and connected consumption– search and review, collaborative filtering– what connected consumers create is not

simply content (e.g. product reviews) but context.

② Consumer coordination at large in the Web: the Amazon co-purchase network

③ Personal data abuse and regulation challenges

④Joint consumption of information and advertisements in massive scale

⑤ Moving the borders between production and consumption

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The Amazon Co-purchase network

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Moving the borders between production and consumption

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Production in the Web① Inputs: information and knowledge reloaded② Incentives: from property to commons③ Peer Production: decentralized inter-creativity

outside the classic market④ From mass to networked media

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Production in the Web① Inputs: information and knowledge reloaded② Incentives: from property to commons③ Peer Production: decentralized inter-creativity

outside the classic market④ From mass to networked media

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information and knowledge reloaded

the production of information is based on 3 inputs:

(a) existing information(b) the mechanical means of conceiving, processing and communicating information and (c) the human communicative capacity (geography still matters in some sectors)

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Incentives: from property to commons

Property rights can be further analyzed to 4 parts:i. The right to use economic resources.ii. The right to modify form and substance of resources.iii. The right to benefit from use of resources.iv. The right to transfer resources.

• Traditional economy: 1st consumers, the rest producers

• Web?• the 4th P: Property, Procurement, Patronage and

Peer Production (commons)34

Peer Production: decentralized inter-creativity outside the

classic market① virtuous cycle : productivity creates new

knowledge, attracts new Users, increase productivity, creates new knowledge...

② A peer’s private productivity < his social productivity due to supply-side knowledge externalities.

③ Peer Production happens if Users do not take advantage of other’s knowledge sharing (free riding), but contribute to the total productivity of the community.

④ usually fails due to lack of critical mass of Editors and in cases where sharing costs are higher than the cost of atomization.

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From mass to networked media① de-massification of the media as a result of

information overload and technological advancements (Toffler)

② In the mass media the profit-maximizing strategy is to attract attention and not to invest in production quality.

③ Networked media: Never before was possible to create, distribute, promote yourself and get feedback for your music, writings or any other online content

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The Web function

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Economic modeling of Web Goods① Advertising in the Web② The Stegeman model③ The KKPS model④ The Katona-Sarvary model⑤ The Dellarocas-Katona-Rand model

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The Stegeman model (2003): assumptions

① Navigators as consumers ② Professional Editors as firms③ Advertisers, Professional Editors with different

optimizing behavior. ④ no strategic interactions between consumers

and firms, forming a totally disconnected Users graph

⑤ WGs not to be connected with hyperlinks. ⑥ The processes of production and consumption

of WGs create links from Users to the Web, forming the dual Users-Web function graph.

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The Stegeman model (2003): results

① In equilibrium, firms set access fees too high at the margin, relative to what would maximize total surplus.

② Firms also put too little quality and embed too much advertising into WGs.

③ By collectively reducing the supply of advertising, firms can often increase their own profits as well as total surplus.

④ firms rely too much on advertising as a source of revenue.

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The KKPS model (2005)① They first modeled the interplay of three out of

four (Users-Topics-Queries-Web) ② contract Users and Queries graphs in a single

entity and investigated their relationship with Topics and WGs.

③ focus on understanding how the interaction of Users with Search Engines lead to a power law Web structure

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The KKPS model (2005)

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The Katona-Sarvary model (2008): assumptions

① Marketing literature② commercial Web: advertising to increase traffic

and revenues, not to inform, nor to signal quality or increase brand loyalty

③ Reference vs. advertising links④ advertising effectiveness is endogenous as it

depends on the network’s structure ⑤ develop a novel approach that results scale-free

patterns for in- and out-links in equilibrium ⑥ Users are divided to consumers and producers

of online content and Search Engines ⑦ Consumers follow random-surfer model 43

The Katona-Sarvary model (2008): assumptions

① Producers are Professional Editors both advertisers and the media.

② Search Engines are not consider being strategic players but an auxiliary mechanism in finding WGs.

③ extended version incorporates Search Engines and Topics: tri-graph among the contracted Editors-Web graph, the Navigators and the Topics graph.

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The Katona-Sarvary model : results

① In all equilibria, both advertising and reference links direct to higher content WGs, verifying the practical importance of in-degree criterion as the basis of many search algorithms (e.g. Google)

② Contrastingly, the pattern of out-links is different for ad. & reference links

③ WGs tend to purchase advertising links from lower content WGs. The higher content WGs prefer to create more reference out-links

④ In the presence of search engines, the above patterns become more pronounced

⑤ The degree distribution of in- and out-links is a scale-free power-law distribution with exponent 2

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The Dellarocas-Katona-Rand model (2010): the issue

① traditional content creators (e.g. newspapers and TV) are loosing a big part of their revenue streams from User-Generated substitutes Platforms, Search Engines and Reconstructors

② raising regulation issues in free reference linking

③ “link economy” or “news.google.com” case④ Who is monetizing links?⑤ First model on the economic implications of free

reference hyperlinks placement to content nodes

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The Dellarocas-Katona-Rand model (2010): assumptions

① Based on the Katona-Sarvary model ② account for simultaneous and interdependent

node-level strategic decisions about both node properties and links.

③ a reference out-link has now benefits and costs for link sources and targets.

④ Navigators maximize their utility for any bit of information per unit of attention

⑤ Aggregators maximize their pay-offs by placing links to the best available WGs.

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The Dellarocas-Katona-Rand model (2010): results

① Links among peer content producers can increase firm profits by reducing competition and duplicate effort.

② Links only form if competition among WGs is not too tough.

③ Linking can sustain market entry of inefficient players.

④ The main benefit of Aggregators to content producers comes from traffic expansion.

⑤ The presence of Aggregators incurs social costs that must not be overlooked.

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To be continued...

① Market regulation and antitrust issues① Is Google the new Microsoft?② Net neutrality

② Web-based development③ Web business models and cases

① The “Web effect” in business ② The Google model③ Linked Data business models

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Thank you!

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Michalis Vafopoulosvafopoulos.org

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