It is the (Web) economy, stupid!
the “promise land” is maturing
NTUA, MBA in techno-economics
Athens, 25/11/2011
Michalis Vafopoulos
vafopoulos.org
The question
Which are the main aspects of the Web
economy?
2
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 +
• ???
3
Main issues
① Web and economics & the Web Science perspective
②Goods in the Web
③Users
④Consumption and Production in the Web
⑤Economic modeling of Web Goods
⑥Market regulation and antitrust issues
⑦Web-based development
4
the Web Science perspective
① Internet economics: the predecessor
② Partial analysis of the Web economy
③ e.g. network economics, digital goods etc.
④ Mainly focus on business implications
⑤ Issues: Auctions, e-commerce, search engines
⑥ Lately, net neutrality & excessive market power
⑦ Web science perspective
– Standalone artifact
– Actor-Networks Theory
– How the Web transforms economy and business
5
Goods in the Web
①Data, information, knowledge
②Information goods
③Knowledge goods
④Digital goods
(+ Wisdom/Ethics)
6
Information goods: definitions
Definition I
the good, which main market value emanates
from the information it contains.
Definition II
anything that can be digitized (Varian)
7
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
8
Information goods: issues
• Versioning (e.g. s/w)
• Bundling (e.g. MS office, Google?)
• Pricing (e.g. discrimination)
9
Knowledge goods
exogenous or endogenous inputs in production as:
①know-what (facts)
②know-why (scientific knowledge)
③know-how (skills)
④know- who (networks)
1, 2 easily reproducible
3, 4 not easily reproducible
4 more important in the Web era
10
Digital goods
Bits with economic value, which are:
①nonrival
②infinitely expansible
③(Initially) discrete or indivisible
④aspatial
⑤recombinant
11
Externality
①analyzes the impact that individual decisionmaking has on the other agents
②comparison of how decision-making involves
others without exchange
③Positive (i.e. education) or
④Negative (i.e. profiling)
12
Network externality
Network externality:
①Some goods/services create more value when
more users consume the same goods and
services
②They have little or even no value if they are
used in isolation (e.g. telephony)
13
Types of network externalities
①Direct (e.g. mobile phones)
②Indirect (e.g. mobile phone accessories)
③Two-sided network effects (or multi-sided
platforms) (e.g. hardware-software platforms and
the Google’s advertising platform)
14
Issues in network markets
Network monopoly (e.g. Microsoft, Google)
Possible regulatory policies:
①Divestiture of the monopoly into separate firms.
②Unbundling or wholesale access to incumbent’s
facilities (e.g. Internet explorer).
③Licensing of proprietary interfaces to
potentially competing platforms.
15
Network externalities in the Web
Source of externalities =linking
①Web 1.0: documents (demand)
②Web 2.0: Users (supply)
③Web 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
• …
17
Web Goods: definition
Existing 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.
18
Web Goods
Their 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 online
Price: 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)
20
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
21
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)
22
Web Goods as commodities
information 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)
23
Web Goods and the others…
24
Web users
25
Web economy
26
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.
27
Consumption in the Web
①More energetic and connected consumption
– search and review, collaborative filtering
– what connected consumers create is not simply
content (e.g. product reviews) but context.
②Consumer 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
28
The Amazon Co-purchase network
29
Moving the borders between production
and consumption
30
Production in the Web
① Inputs: information and knowledge reloaded
② Incentives: from property to commons
③ Peer Production: decentralized inter-creativity
outside the classic market
④ From mass to networked media
31
Production in the Web
① Inputs: information and knowledge reloaded
② Incentives: from property to commons
③ Peer Production: decentralized inter-creativity
outside the classic market
④ From mass to networked media
32
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)
33
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 intercreativity outside the classic market
① 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.
35
From mass to networked media
① 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
36
The Web function
37
Economic modeling of Web Goods
① Advertising in the Web
② The Stegeman model
③ The KKPS model
④ The Katona-Sarvary model
⑤ The Dellarocas-Katona-Rand model
38
The Stegeman model (2003): assumptions
① Navigators as consumers
② Professional Editors as firms
③ 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.
39
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.
40
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
41
The KKPS model (2005)
42
The Katona-Sarvary model (2008):
assumptions
① Marketing literature
② commercial Web: advertising to increase traffic and
revenues, not to inform, nor to signal quality or
increase brand loyalty
③ Reference vs. advertising links
④ 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.
44
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 scalefree power-law distribution with exponent 2
45
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” case
④ Who is monetizing links?
⑤ First model on the economic implications of free
reference hyperlinks placement to content nodes
46
The Dellarocas-Katona-Rand model
(2010): assumptions
① Based on the Katona-Sarvary model
② account for simultaneous and interdependent nodelevel 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.
47
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.
48
To be continued...
①Market regulation and antitrust issues
①Is Google the new Microsoft?
②Net neutrality
②Web-based development
③Web business models and cases
①The “Web effect” in business
②The Google model
③Linked Data business models
49
Thank you!
?
Michalis Vafopoulos
vafopoulos.org
50