Stern School of
Business
The New Economy, Networks, and Digital
Convergence
Prof. Nicholas
Economides
B30.2345.20, Fall
2010
Sat. 9am - 12pm
Office hours: M. 4-6, 7-84 KMEC
(212) 998-0864, fax
995-4218
email: economides@stern.nyu.edu
www: http://www.stern.nyu.edu/networks/
course page: http://www.stern.nyu.edu/networks/New_Economy.html
Course Outline
This course analyzes the
economics of the new economy, networks, the Internet and of related industries
such as telecommunications and cable television. The emergence of the Internet
has allowed for new business models. These electronic trade models take
advantage of the search capabilities and economies of scale of the Internet. In
this course, we will study key strategic issues facing companies that utilize
these new business models. For example, we will study technology transitions in
distribution of digitized music and video as electronic downloads in contrast
with distribution in physical form (CD, DVD, Blu-Ray) in stores or by mail.
Further, we will discuss distribution of physical goods (for example books,
TVs) based on search at virtual stores (such as Amazon.com) in contrast with
traditional brick and mortar stores. We will also analyze the merits of the
various pricing methods used (a-la-carte, bundled, subscription).
Going deeper on the creation and
format of digital goods, we will analyze a decision of a company on whether to
provide products that are compatible with those of competitors, or instead to
engage in technical standards wars such as VHS vs. Beta in video players in the
1980s, Windows vs. Mac vs. Linux in operating systems for PCs, MP3 vs. WMA vs.
RealAudio in digitized music, and HD DVD vs. Blu-Ray in the last two years.
Applying models from the economics of networks, we will discuss the pros and
cons of being compatible with competitors. In networks and in many industries
with complementary goods, we observe network effects, that is, that goods are
more valuable if more units are sold. For example, a PC operating system (such
as Windows) is more valuable when it has bigger market share, and similarly for
search engines and digital music and video formats. We will show that this
common feature in the new economy results in significant inequality in the size
of firms, very large profits for the top firms (Microsoft, Google, Oracle) and
tiny profits for almost all other companies. In this context, we will discuss
the antitrust issues that arise from the dominant positions of the top firms in
these markets, focusing on the Microsoft antitrust case among others.
We will also study the evolution
of the Internet and the infrastructure industries on which it is based. We will
look at modern telecommunications, the crucial antitrust intervention that
resulted in the 1981 breakup of AT&T, the reform attempted by the
Telecommunications Act of 1996, and the emergence of cellular and other mobile
telecommunications. We will study the emerging intermodal competition between
bundles of services (voice, Internet, and prepackaged video) provided by either
telecom or cable TV, and the traditional alternative stand-alone services.
Finally, we will discuss recent
and proposed mergers and cooperative agreements such as the (withdrawn)
agreement between Yahoo and Google for cooperation in ads placement, and the
partial acquisition of Yahoo by Microsoft.
Invited Speakers
- Rick Whitt,
Washington Telecom and Media Counsel, Google (invited)
Requirements. This
course is intended for MBA students who have completed the core microeconomics
course. Law students may take the course with consent of the instructor.
Students are expected to participate in class. Students will submit a paper in
lieu of a final exam. After the midterm, student groups will start
presentations on the preliminary versions of their final paper.
Readings.
There are no required textbooks. We
will rely on the package of notes and readings that are available to download.
The following books will also be on reserve at the library.
- Chris Anderson, The Long Tail, Hyperion, New York,
2006.
- John Battelle, The Search, Penguin, New York,
2005.
- Brock, Gerald, The Telecommunications
Industry: The Dynamics of Market Structure, Harvard University Press,
1981.
- Carlton, Dennis, and Jeff
Perloff, Modern Industrial Organization, Harper Collins.
- Crandall, Robert, After
the Breakup: US Telecommunications in a More Competitive Era, The
Brookings Institute, Washington, D.C., 1991.
- Laffont, Jean-Jacques, and Jean Tirole,
(2002), Competition in Telecommunications, MIT
Press.
- Mitchell, Bridger M., and
Ingo Vogelsang, (1991), Telecommunications Pricing: Theory and
Practice. Cambridge University Press.
- Owen, Bruce, and Steve
Wildman, Video Economics, Harvard University Press, 1992.
- Shapiro, Carl, and Hal
Varian, Information Rules,
Harvard Business School Press, 1999.
- Wenders, John, The
Economics of Telecommunications: Theory and Policy, Ballinger, 1987.
Detailed Outline
A.
Unregulated Network Markets
1. Introduction and Discussion
of Digital Convergence (1/2 week)
- What is the information
superhighway
- What is digital
convergence, what markets it affects and how
- What are the new business
models facilitated by the Internet
Readings
- Economides, Nicholas,
notes to be distributed
2. A Primer on the Economics of the Old and the New Economy (2 weeks)
- What do we know from the
old economy
- Perfect competition
- Concentrated markets;
monopoly; oligopoly; market power
- Horizontal and vertical
relations between markets
- The new economy
- Network effects
- Nature and causes
- Complementarity
- Technical compatibility
- Networks and network
structure
- Market structure with
network effects
- Upward-sloping demand
curve
- Critical mass
- Fast expansion of new
networks compared with non-network innovations
- Winner takes most:
extreme inequality in market shares and profits in network industries
- Importance of installed
base
- Lock-in and path-dependence
- Entry barriers
- Examples / cases
- Compatibility
- FAX
- Voice
Telecommunications
- Incompatibility
- Beta v. VHS
- CD v. LP
- Windows vs. Apple OS
vs. Linux
- PC audio formats (MP3,
WMA, AU, RM, etc.)
- Video formats (MPEG,
AVI, WMV, etc.)
- IM formats
- New DVD formats (Blu
Ray, HD DVD)
Readings
- Class
notes 1
- Class notes 2
- Network
Economics Slides
- Economides, Nicholas The Economics of
Networks, International Journal of Industrial Organization,
vol. 16, no. 4, pp. 673-699 (October 1996).
- Economides, Nicholas, and
Charles Himmelberg, (1995), Critical Mass and
Network Evolution in Telecommunications, in Gerard Brock (ed.), Telecommunications
Policy Research Conference Selected Papers 1995.
3. Public Policy: Antitrust and Regulation (1/2 week)
1. Sherman
Act, Clayton Act; FTC Act;
2. Horizontal
Merger Guidelines
- Sectoral Regulation
- Application of antitrust
law to telecommunications
Reading
- Carlton, Dennis, and Jeff
Perloff, Modern Industrial Organization, Harper Collins.
4. Application of Network Economics to the Computer Industry (1 week)
- The market for operating
systems for personal computers
- The role of compatibility
- Microsoft
- Antitrust suits (US and
EU)
- Allegations
- Defense
- Rulings
- Remedies
Reading
5. The Internet (2 weeks)
- Structure of the Internet;
ISPs; servers;
- The Internet backbone
- Structure
- Pricing
- Competition issues
- Information portals: Google, Yahoo, etc.
- Local Internet access
- Network neutrality, two-sided pricing
- Network management
- Invited speaker, Rick Whitt
- Cybersecurity, privacy,
anonymity
Reading
- Economides, Nicholas
(2007), The
Economics of the Internet, in The New Palgrave Dictionary of
Economics, London: Macmillan.
- Economides, Nicholas
(2006), The
Economics of the Internet Backbone, in Handbook of
Telecommunications. Amsterdam: Elsevier Publishers.
- Economides, Nicholas and
Joacim Tag (2009), Net
Neutrality on the Internet: A Two-sided Market Analysis, NET Institute
Working Paper.
- Economides, Nicholas
(2010a), Why
Imposing New Tolls on Third-Party Content and Applications Threatens
Innovation and Will Not Improve Broadband Providers’ Investment,” NET
Institute Working paper #10-01, January 2010.
- Economides, Nicholas
(2010b), Broadband
Openness Rules Are Fully Justified by Economic Research, NET Institute
Working paper #10-02, April 2010.
6. Electronic Commerce (1/2
week)
- Facilitation of
transactions
- Information goods
- Content dissemination of
information goods
- Dissemination of video content
- Electronic money and
payment systems
Reading
7.
Technology Transitions in Information Delivery (1 week)
- Netflix vs. traditional
movie rental
- Electronic distribution of
music
- Piracy
- Peer to peer; Napster and
Torrent
Reading
- The Music Industry and the
Internet, HBS case
- Netflix, Stanford case
B.
Regulated Network Markets; Telecommunications
8. Structure of the
Telecommunications Network and Markets (1 week)
- Types of
telecommunications and related services
- Markets and relationships
across markets; pricing
- End-to-end (final
services) markets
- Residential
- Business
- Voice
- Data
- Internet
- Price discrimination
- Intermediate markets;
termination access; resale
- Equipment markets
Readings
- Class notes
- Mitchell, Bridger M., and
Ingo Vogelsang, (1991), Telecommunications Pricing: Theory and Practice.
9. History of
Telecommunications (1/2 week)
- Invention of the
telegraph; facsimile; race to standardization
- Invention of the
telephone; early years
- The years of competing
telephone networks
- By 1935, consolidation
into AT&T (89% market share) and GTE (10% market share)
Readings
- Mueller, Milton L.,
(1996), Universal Service.
- Weiman, David F., (1992), Reaching Out to America: Building
Telephone and Urban Networks in the Bell System, mimeo.
- Weiman, David F., and
Richard C. Levin, (1994), Preying for Monopoly? The Case of Southern Bell
Telephone Company, 1894-1912, Journal
of Political Economy, vol. 102, no. 1, pp. 103-126.
- Gabel, David, and David F.
Weiman, (1994), Historical
Perspectives on Interconnection between Competing Local Operating
Companies: The United States, 1894-1914, in David Gabel and David F.
Weiman, eds., Opening Networks to
Competition: The Regulation and Pricing of Access (Norwell, MA: Kluwer
Academic Press), pp. 75-105.
- Gabel, David (1994), Competition
in a Network Industry: The Telephone Industry, 1894-1910, The
Journal of Economic History, vol. 54, no. 3, pp. 543-572.
10. Cable Television (1/2 week)
- History; deregulation and
re-regulation
- Fiber to the home and
fiber to the curve
- Bundling of channels
- Bundling of cable TV and
phone services
Reading
- Owen, Bruce and Steve
Wildman, Cable Television, Chap. 6 in Video Economics, 1992.
11. Government
Intervention and Antitrust Actions Against AT&T (1 week)
- Creation of the Federal
Communications Commission (1934)
- Regulation of
telecommunications and Cable
- The Kingsbury commitment
- US v. Western Electric
(1949)
- Breakup of AT&T
- Modified Final Judgment;
restrictions on companies in the lines of business they can participate
- Vertical price squeeze;
why local telephone companies were not allowed in long distance
Reading
12. The
Post AT&T-Breakup Years (1984-1996) (1/2 week)
- Long distance market
becomes competitive
- Wireless markets become
prominent
- Local exchange carriers
are unexpectedly profitable
- FCC auctions spectrum
for pagers and cellular phones; PCS is introduced
- Broadband spectrum
auctions; PCS
Reading
- Crandall, Robert, After the Breakup: US
Telecommunications in a More Competitive Era, The Brookings
Institution, Washington, D.C., 1991.
13.
The Telecommunications Act of 1996 and its Implementation (1 week)
- Logic
of the 1996 Act
- Entry
into local service; Sections 251, 252
- Entry
into long distance service; Sections 271, 272
- Universal
service; new way to raise the subsidy
- Guidelines
for the implementation of the Act
- The failure
of the implementation of the 1996 Act
- Legal
disputes
- FCC;
PUCs
- Federal
and State courts
- Intermodal
competition
Readings
14. Mergers, Consolidation and Spin-offs; the
Future Telecommunications and New Economy Landscape
- RBOC Mergers
- SBC-Pacific Bell
- Bell Atlantic-NYNEX
- SBC-SNET
- SBC-Ameritech
- Bell Atlantic-GTE
forming Verizon
- Long Distance and Other Mergers
- Qwest-LCI
- MCI-WorldCom
- AT&T-TCG
- AT&T-TCI
- AT&T-MediaOne
- Qwest-US West
- MCI-WorldCom with Sprint
(failed, not receiving antitrust approval)
- AT&T breakup (into
AT&T, AT&T wireless, and AT&T Broadband)
- AT&T
Broadband-Comcast
- RBOCs with Long Distance
Carriers
- Wireless Mergers
- AT&T
Wireless-Cingular
- Sprint-Nextel
- Consolidation in Internet
Search
Copyright 2010, N. Economides