TABLE OF CONTENTS
Acknowledgments
Introduction - Avi Goldfarb, Shane M. Greenstein, Catherine E. Tucker
DOI: 10.7208/chicago/9780226206981.003.0016
[digitization, information technology, technology policy, internet supply and demand, economic frictions]
Research on the economics of digitization studies how markets change when digitization leads to reproduction at zero cost and an abundance of digital data. Digital technology has led to a rapid decline in the cost of storage, computation, and transmission of data. As a consequence, economic activity is increasingly digital. The transformative nature of digital technology has implications for understanding economic activity, for consumer behavior, for competitive strategy, fornewfirmformation, and for determining policy. The introduction emphasizes the three key themes of the book’s chapters: Internet Supply and Demand, Economic Frictions and New Markets, andGovernment Policy. Each chapter is summarized and put into the context of the broader literature on the economics of digitization, providing a viewpoint on that literature. We do not view the economics of digitization as a new field. Instead, digitization research touches ona variety of fields. Research on the economics of digitization is distinguished by an emphasis on how digital technology and digital data interact with market outcomes. Specifically, economic settings transformed by digital data tend to have very low marginal costs of production and distribution, as well as lower transactions costs and market frictions, thereby raising numerous questions and issues. (pages 1 - 18)
This chapter is available at:
https://academic.oup.com/chica...
I - Internet Supply and Demand
Chapter 1 - Modularity and the Evolution ofthe Internet / Timothy Simcoe - Timothy Simcoe
DOI: 10.7208/chicago/9780226206981.003.0001
[standards, coordination, modularity, internet, innovation, general purpose technology]
This chapter offers an empirical case study of the Internet architecture from an economic viewpoint. Data collected from the two main Internet standard setting organizations, which are the Internet Engineering Task Force (IETF) and the World Wide Web Consortium (W3C), demonstrate the modularity of the Internet architecture, as well as the specialized division of labor that produces it. An analysis of citations to Internet standards provides evidence on the diffusion and commercial application of new Internet protocols. The author ties these observations together by arguing that modularity helps the Internet, and perhaps digital technology more broadly, to avoid long-run decreasing returns to investments in innovation by facilitating low-cost adaptation of a shared general-purpose technology to the demands of heterogeneous applications. (pages 21 - 54)
This chapter is available at:
https://academic.oup.com/chica...
Comment / Timothy F. Bresnahan
Chapter 2 - What Are We Not Doing When We Are Online? / Scott Wallsten - Scott Wallsten
DOI: 10.7208/chicago/9780226206981.003.0002
[time value, internet leisure activities, crowding-out]
The Internet has radically transformed the way we live our lives. The net changes in consumer surplus and economic activity, however, are difficult to measure because some online activities, such as obtaining news, are new ways of doing old activities while new activities, like social media, have an opportunity cost in terms of activities crowded out. This paper uses data from the American Time Use Survey from 2003–2011 to estimate the crowdout effects of leisure time spent online. That data show that time spent online and the share of the population engaged in online activities has been increasing steadily. I find that, on the margin, each minute of online leisure time is correlated with 0.29 fewer minutes on all other types of leisure, with about half of that coming from time spent watching TV and video, 0.05 minutes from (offline) socializing, 0.04 minutes from relaxing and thinking, and the balance from time spent at parties, attending cultural events, and listening to the radio. Each minute of online leisure is also correlated with 0.27 fewer minutes working, 0.12 fewer minutes sleeping, 0.10 fewer minutes in travel time, 0.07 fewer minutes in household activities, and 0.06 fewer minutes in educational activities. (pages 55 - 86)
This chapter is available at:
https://academic.oup.com/chica...
Comment / Chris Forman
II - Digitization, Economic Frictions, and New Markets
Chapter 3 - The Future of Prediction: How Google Searches Foreshadow Housing Prices and Sales / Lynn Wu and Erik Brynjolfsson - Lynn Wu, Erik Brynjolfsson
DOI: 10.7208/chicago/9780226206981.003.0003
[online search, prediction, housing prices, real estate, Google trends]
We demonstrate how data from search engines such as Google provide an accurate but simple way to predict future business activities. Applying our methodology to predict housing market trends, we find that a housing search index is strongly predictive of future housing market sales and prices. For state-level predictions in the United States, the use of search data produces out-of-sample predictions with a smaller mean absolute error than the baseline model that uses conventional data but lacks search data. Furthermore, we find that our simple model of using search frequencies beat the predictions published by experts from the National Association of Realtors by 23.6% for future US home sales. We also demonstrate how these data can be used in other markets, such as home appliance sales. This type of “nanoeconomic” data can transform prediction in numerous markets, thereby improving business and consumer decision-making. (pages 89 - 118)
This chapter is available at:
https://academic.oup.com/chica...
Chapter 4 - Bayesian Variable Selection for Nowcasting Economic Time Series / Steven L. Scott and Hal R. Varian - Steven L. Scott, Hal R. Varian
DOI: 10.7208/chicago/9780226206981.003.0004
[forecasting, nowcasting, Bayesian methods]
We consider the problem of short-term time series forecasting (nowcasting) when there are more possible predictors than observations. The motivating example is the use of Google Trends search engine query data as a contemporaneous predictor of economic indicators. Our preferred approach combines three Bayesian techniques: Kalman filtering, spike-and-slab regression, and model averaging. The Kalman filter can be used to control for time series feature, such as seasonality and trend; the regression can be used to incorporate predictors such as search engine queries; and model averaging can be used to reduce the danger of overfitting. Overall the Bayesian approach allows a flexible way to incorporate prior knowledge, both subjective and objective, into the estimation procedure. We illustrate this approach using search engine query data as predictors for consumer sentiment and gun sales. (pages 119 - 136)
This chapter is available at:
https://academic.oup.com/chica...
Chapter 5 - Searching for Physical and Digital Media: The Evolution of Platforms for Finding Books / Michael R. Baye, Babur De los Santos, and Matthijs R. Wildenbeest - Michael R. Baye, Babur De los Santos, Matthijs R. Wildenbeest
DOI: 10.7208/chicago/9780226206981.003.0005
[product search, books, internet, search engines, Amazon]
This chapter provides a data-driven overview of the different online platforms that consumers use to search for books and for booksellers, and documents how the use of these platforms is shifting over time. Our data suggest that, as a result of digitization, consumers are increasingly conducting searches for books at retailer sites and using closed systems (e.g., the Kindle and Nook) rather than at general search engines (e.g., Google or Bing). We also highlight a number of challenges that will make it difficult for researchers to accurately measure internet-based search behavior in the years to come. Finally, we highlight a number of open agenda items related to the pricing of books and other digital media, as well as consumer search behavior. (pages 137 - 168)
This chapter is available at:
https://academic.oup.com/chica...
Comment / Marc Rysman
Chapter 6 - Ideology and Online News / Matthew Gentzkow and Jesse M. Shapiro - Matthew Gentzkow, Jesse M. Shapiro
DOI: 10.7208/chicago/9780226206981.003.0006
[news, internet, echo chambers]
News consumption is moving online. If this move fundamentally changes how news is produced and consumed it will have important ramifications for politics. In this chapter the authors formulate a model of the supply and demand of news online that is motivated by descriptive features of online news consumption. The authors estimate the demand model using a combination of microdata and aggregate moments from a panel of Internet users. They evaluate the fit of the model to key features of the data and then use it to compute the predictions of the supply model. They also discuss how a model such as this can inform debates about the effects of the Internet on political polarization and other outcomes of interest. (pages 169 - 190)
This chapter is available at:
https://academic.oup.com/chica...
Chapter 7 - Measuring the Effects of Advertising: The Digital Frontier / Randall Lewis, Justin M. Rao, and David H. Reiley - Randall Lewis, Justin M. Rao, David H. Reiley
DOI: 10.7208/chicago/9780226206981.003.0007
[advertising, statistical inference, field experiments, computational advertising, display, search, measurement]
Online advertising offers unprecedented opportunities for measurement. A host of new metrics, clicks being the leading example, have become widespread in advertising science. New data and experimentation platforms open the door for firms and researchers to measure true causal effects of advertising on a variety of consumer behaviors, such as purchases. We dissect how the new metrics and methods can be used to provide insight on the returns to advertising by setting out the questions that we think can be answered by current data and methods, those that we believe will be in play within five years, and those that we believe could not be answered with arbitrarily large and detailed data. We pay close attention to the advances in computational advertising that are not only increasing the impact of advertising with algorithmic targeting, but also by shifting the focus from “who to hit” to “what do I get.” (pages 191 - 218)
This chapter is available at:
https://academic.oup.com/chica...
Chapter 8 - Digitization and the Contract Labor Market: A Research Agenda / Ajay Agrawal, John Horton, Nicola Lacetera, and Elizabeth Lyons - Ajay Agrawal, John Horton, Nicola Lacetera, Elizabeth Lyons
DOI: 10.7208/chicago/9780226206981.003.0008
[labor, development, international, digital markets]
Online contract labor globalizes traditionally local labor markets, with platforms that enable employers, most of whom are in high-income countries, to more easily outsource tasks to contractors, primarilylocated in low-income countries. This market is growing rapidly; we provide descriptive statistics fromone of the leading platforms where the number of hours worked increased 55% from 2011 to 2012, with the2012 total wage bill just over $360 million. We outline three lines of inquiry in this market setting that arecentral to the broader digitization research agenda: 1) How will the digitization of this market influencethe distribution of economic activity (geographic distribution of work, income distribution, distributionof work across firm boundaries)?; 2) What is the magnitude and nature of information frictions inthese digital market settings as reflected by user responses to market design features (allocation ofvisibility, investments in human capital acquisition, machine-aided recommendations)?; 3) How will thedigitization of this market affect social welfare (increased efficiency in matching, production?)? We drawupon economic theory as well as evidence from empirical research on online contract labor markets andother related settings to motivate and contextualize this research agenda. (pages 219 - 256)
This chapter is available at:
https://academic.oup.com/chica...
Comment / Christopher Stanton
Chapter 9 - Some Economics of Private Digital Currency / Joshua S. Gans and Hanna Halaburda - Joshua S. Gans, Hanna Halaburda
DOI: 10.7208/chicago/9780226206981.003.0009
[platforms, currency, Facebook Credits]
This paper reviews some recent developments in digital currency, focusing on platform-sponsored currencies such as Facebook Credits. We develop a model of platform management in which platform currency offers “enhancements” to users who spend time on the platform. Users allocate time between earning money outside of the platform and using the platform. The platform can equip its currency in different attributes and limitations, with the goal of maximizing profit. We show that limiting functionality of currency (e.g., prohibiting transferability) may increase usage on the platform. But depending on the source of the revenue, different attributes of the currency are optimal. We also find that it will not likely be profitable for such currencies to expand to become fully functional competitors to state-issued currencies. However, it is still possible, in some cases for limited platform-sponsored currencies to be attractive outside of the platform. (pages 257 - 276)
This chapter is available at:
https://academic.oup.com/chica...
III - Government Policy and Digitization
Chapter 10 - Estimation of Treatment Effects from Combined Data: Identification versus Data Security / Tatiana Komarova, Denis Nekipelov, and Evgeny Yakovlev - Tatiana Komarova, Denis Nekipelov, Evgeny Yakovlev
DOI: 10.7208/chicago/9780226206981.003.0010
[data protection, model identification, data combination]
The security of sensitive individual data is a subject of indisputable importance. One of the majorthreats to sensitive data arises when one can link sensitive information and publicly available data. In this paper the authors demonstrate that even if the sensitive data are never publicly released, the pointestimates from the empirical model estimated from the combined public and sensitive data may leadto a disclosure of individual information. Their theory builds on the work in Komarova, Nekipelovand Yakovlev (2011) where they analyze the individual disclosure that arises from the releases ofmarginal empirical distributions of individual data. The disclosure threat in that case is posed bythe possibility of a linkage between the released marginal distributions. In this chapter, they analyze adifferent type of disclosure. Namely, they use the notion of the risk of statistical partial disclosure tomeasure the threat from the inference on sensitive individual attributes from the released empiricalmodel that uses the data combined from the public and private sources. As the main example the authors consider a treatment effect model in which the treatment status of an individual constitutes sensitiveinformation. (pages 279 - 308)
This chapter is available at:
https://academic.oup.com/chica...
Chapter 11 - Information Lost: Will the “Paradise” That Information Promises, to Both Consumer and Firm, Be “Lost”on Account of Data Breaches? The Epic is Playing Out / Catherine L. Mann - Catherine L. Mann
DOI: 10.7208/chicago/9780226206981.003.0011
[data breach, privacy, big data, information security, internet, electronic commerce, regulation]
Vast amounts of information result from business and consumer search, communication, and transactions. All this information can enhance market efficiency and consumer surplus as firms tailor products to buyers. But, there is increased risk of information loss. What issues should be on the Digital Agenda with regard to information loss, and what data are available to inform and generate incentives for consumer, business, and policy interactions in the information marketplace? This paper reviews the situation and points out where we need more thought and more data. Topics include: (1) Frameworks for analysis: How should we model the information marketplace, particularly with regard to the benefits and costs of information aggregation and protection? (2) Quantification and data: What is the evidence on the prevalence and nature of information loss, and what are the costs of information loss, and to whom? (3) Market and Policy Response: What do we know about the efficacy of market vs. other approaches to incentivize market participants to avoid loss or remediate after information loss? Throughout, of particular interest is the international dimension of the information marketplace. What issues arise when countries differ in their attitudes and policies toward the information marketplace? (pages 309 - 356)
This chapter is available at:
https://academic.oup.com/chica...
Comment Amalia R. Miller
Chapter 12 - Copyright and the Profitability of Authorship: Evidence from Payments to Writers in the Romantic Period / Megan MacGarvie and Petra Moser - Megan MacGarvie, Petra Moser
DOI: 10.7208/chicago/9780226206981.003.0012
[copyright, intellectual property, culture, contracts]
Proponents of stronger copyright terms have argued that stronger copyright terms encourage creativity by increasing the profitability of authorship. Empirical evidence, however, is scarce, because data on the profitability of authorship is typically not available to the public. Moreover, at current copyright lengths of 70 years after the author’s death, further extensions may not have any effects on the profitability of authorship. To investigate effects of copyright at lower pre-existing levels of protection, this chapter introduces a new data set of publishers’ payments to authors of British fiction between 1800 and 1830. These data indicate that payments to authors nearly doubled following an increase in the length of copyright in 1814. These findings suggest that starting from low pre-existing levels of protection policies that strengthen copyright terms may, in fact, increase the profitability of authorship. (pages 357 - 384)
This chapter is available at:
https://academic.oup.com/chica...
Comment Koleman Strumpf
Chapter 13 - Understanding Media Markets in the Digital Age: Economics and Methodology / Brett Danaher, Samita Dhanasobhon, Michael D. Smith, and Rahul Telang - Brett Danaher, Samita Dhanasobhon, Michael D. Smith, Rahul Telang
DOI: 10.7208/chicago/9780226206981.003.0013
[piracy, regulation, digital distribution, creative incentives, copyright, natural experiment]
Digitization raises a variety of important academic and managerial questions around firm strategies and public policies for the content industries, with many of these questions influenced by the erosion of copyright caused by Internet file-sharing. At the same time, digitization has created many new opportunities to empirically analyze these questions by leveraging new data sources and abundant natural experiments in media markets. In this chapter the authors describe the open “big picture” questions related to digitization and the copyright industries, and discuss methodological approaches to leverage the new data and natural experiments in digital markets to address these questions. They close the chapter with a specific proof of concept research study that analyzes an important academic and managerial question — the impact of legitimate streaming services on the demand for piracy. They use ABC’s decision to add its content to Hulu.com as a natural experiment and show that it resulted in an economically and statistically significant drop in piracy of that content. (pages 385 - 406)
This chapter is available at:
https://academic.oup.com/chica...
Chapter 14 - Digitization and the Quality of New Media Products: The Case of Music / Joel Waldfogel - Joel Waldfogel
DOI: 10.7208/chicago/9780226206981.003.0014
[digitization, copyright, innovation, recorded music]
Although recorded music revenue has collapsed since the explosion of file sharing, results elsewhere suggest that the quality of new music has not suffered. One possible explanation is that digitization has allowed more firms to bring music to market using lower-cost methods of production, distribution, and promotion. Forces increasing the number of products released may allow consumers to discover more appealing choices if they can sift through the offerings. Digitization has promoted Internet radio and online music reviewers, providing alternatives to radio airplay as means for new product discovery. To explore this, the author assembles data on new music released between 1980 and 2010, and on particular albums’ sales, airplay on traditional and Internet radio, and album reviews at Metacritic since 2000. He documents that the total quantity of new albums released annually has increased sharply since 2000, driven by independent labels and purely digital products. Second, increased availability has been accompanied by reduced concentration of sales in the top albums. Third, new information channels change the number and kinds of products about which consumers have information. Fourth, more albums find commercial success without substantial traditional airplay. Finally, independent label albums account for a growing share of commercially successful albums. (pages 407 - 442)
This chapter is available at:
https://academic.oup.com/chica...
Chapter 15 - The Nature and Incidence of Software Piracy: Evidence from Windows / Susan Athey and Scott Stern - Susan Athey, Scott Stern
DOI: 10.7208/chicago/9780226206981.003.0015
[intellectual property, software piracy, international technology diffusion, innovation incentives, microsoft windows]
This chapter evaluates the nature, relative incidence, and drivers of software piracy. The authors measure piracy for a specific product – Windows 7 – which was associated with a significant level of private sector investment. Using anonymized telemetry data, the authors characterize how piracy occurs, the relative incidence of piracy across different economic and institutional environments, and the impact of enforcement efforts on choices to install pirated versus paid software. The authors find that: (a) most “retail piracy” can be attributed to a small number of widely distributed “hacks” available through the Internet, (b) the incidence of piracy varies significantly with the microeconomic and institutional environment, and (c) software piracy primarily focuses on the most “advanced” version of Windows (Windows Ultimate). After controlling for a small number of measures of institutional quality and broadband infrastructure, one important candidate driver of piracy – GDP per capita – has no significant impact on the observed piracy rate, while the innovation orientation of an economy is associated with a lower rate of piracy. Finally, the authors evaluate how piracy changes in response to country-specific anti-piracy enforcement efforts against specific peer-to-peer websites; overall, they find no evidence that such efforts have affected the incidence of software piracy. (pages 443 - 480)
This chapter is available at:
https://academic.oup.com/chica...
Comment Ashish Arora
Contributors
Author Index
Subject Index
