14.27

Economics and E-commerce

Fall 2001
Class meets in E51-063
Tuesdays and Thursdays 10:30-12:00.
Recitation meets Friday at 11 in E51-063

                                                                Prof.: Glenn Ellison                                         TA: Jonathan Weinstein
                                                                          E52-274B
                                                                          617- 253-8702
                                                                     gellison@mit.edu                                              jonw@mit.edu

                                                        Office hours: W 2:40-4 or by appt.                        Office hours:

Assistant: Caroline Smith

E52-274, 617-253-3630, crsmith@mit.edu

  1. Course Description: This course uses theoretical models and studies of "old economy" industries to help understand the growth and future of electronic commerce. We will begin with a discussion of relevant topics from industrial organization including monopoly pricing, price discrimination, product differentiation, barriers to entry, network externalities, search and first-mover advantages. The largest part of the course will be a discussion of a number of e-industries. In this section we'll discuss extensions and applications of the ideas from the first part of the course, draw analogies to previous technological revolutions and read current case studies. Finally, we'll discuss two additional topics: bubbles in asset markets and the macroeconomic effects of the Internet.
  2. Prerequisites: This is advanced undergraduate courses. It requires that students be comfortable with mathematical modeling, microeconomics, econometric analysis and basic game theory. Students are required to have either taken 14.03 and 18.06; or to have taken 14.12 and 6.840. Familiarity with statistics at the level of 14.30 will be useful at several points in the course. Econometrics will also come up occasionally. The material covered in the first month of the course has substantial overlap with material covered in 14.20.
  3. Texts: There is no good textbook to use for studying e-commerce. Coming to lectures will be very important. Students who want a structured textbook presentation or who want to skip lectures should take another course. Most of the readings for the course are academic and popular articles. Some of these can be found on the Internet and others will be on reserve in the library. The syllabus also includes required websurfing that should be done in advance of many lectures. I have listed two texts as recommended in the Coop, but none will be used heavily. The most highly recommended is Industrial Organization: Contemporary Theory and Practice by Pepall, Richards and Norman [PRN]. This book will be useful as a reference for the models I'll be covering in the first month. Another book that some students may want to buy is Information Rules by Shapiro and Varian [SV]. It has interesting nontechnical discussions of network externalities and some other relevant topics. An expensive MBA text that I won’t use much, but which provides background information relevant to some lectures is Principles of Internet Marketing by Hanson [H]. Two recent e-commerce textbooks are Digital Dealing by Robert Hall and The Internet Economy by Soon-Yong Choi and Andrew Whinston. Neither has much overlap with most of my lectures, but they do provide additional reading for interested students. If the books are not in the Coop a good place to comparison shop is www.dealtime.com. I can't vouch for the quality of the vendors listed there, but would be interested to hear feedback from any students who try them.
  4. Requirements: The course grade will be based on six problem sets (20%), a short paper (15%), a midterm exam (25%) and a three hour final exam (40%). You are expected to complete the problem sets on your own. Regular attendance at the recitation is strongly recommended, as the T.A. will discuss problem sets, clarify lecture material, and provide other useful guidance. The midterm exam will be given on October 25. The final exam will be during the exam period. The paper will be due on November 15.  The problem sets will probably be due are Sept. 18, 25, Oct. 2, 16, Nov. 6, 27 and December 6.


Course Outline and Reading List
 

I. Introduction One lecture September 6

Hanson, Ch. 1

Bruce Mayzlish, Preface to The Railroad and the Space Program An Exploration in Historical Analogy, vii-xv.
 
 

II. Background Concepts Seven lectures A. Monopoly pricing and price discrimination September 6, 11, 13

PRN Sections 3.1, 3.2, 4.1

H Chapter 2

SV Chapters 2, 3

Raymond Deneckere and Preston McAfee, "Damaged Goods," Journal of Economics and Management Strategy 5, 149-174, 1996

B. Competition and oligopoly pricing September 13, 18

PRN Sections 5.4, 4.2; Chapter 7

SV Chapter 2

Brynjolfsson, Erik and Michael Smith, "Consumer Decision-making at an Internet Shopbot," mimeo.

Glenn Ellison and Sara Fisher Ellison, "Search, Obfuscation and Price Elasticities on the Internet," mimeo.

C. Market leadership Sept. 20, 25

PRN Section 12.4

H Chapter 3

SV Chapters 5, 7

Peter Golder and Gerard Tellis, "Pioneer Advantage: Marketing Logic or Marketing Legend," Journal of Marketing Research 30, 158-170, 1993.

Michael Gort and Steven Klepper, "Time Paths in the Diffusion of Product Innovations," The Economic Journal 92, 630-653, 1982.

Leonard Reich, "Research, Patents, and the Struggle to Control Radio: A Study of Big Business and the Uses of Industrial Research," Business History Review 51, 208-235, 1977.

S. J. Liebowitz and Stephen Margolis, "The Fable of the Keys," Journal of Law and Economics 33, 1-26, 1990.

D. Regulation September 27

George J. Stigler, "The Theory of Economic Regulation," The Bell Journal of Economics, 1971.

Ronald Coase, "Payola in Radio and Television Broadcasting," The Journal of Law and Economics 22 [2] Oct., 269-328, 1979.

Austan Goolsbee, "In a World without Borders: The Impact of Taxes on Internet Commerce," Quarterly Journal of Economics 115, 561-576, 2000.
 

III. E-Industries Thirteen lectures A. Auctions October 2, 4

Required websurfing: eBay, Yahoo! Auctions, Bidder's Edge

H Chapter 11

David Lucking-Reiley, "Auctions on the Internet: What's Being Auctioned and How," mimeo.

"Online Auctions in 1999," Stanford Graduate School of Business Case EC-7, pp. 1-5

Paul Resnick and Richard Zeckhauser, "Trust Among Strangers in Internet Transactions: Empirical Analysis of eBay’s Reputation System," Journal of Industrial Economics, forthcoming.

Lisa Geurnsey, "The Powers Behind the Auctions," New York Times August 20, 2000, Section 3, p.1, col. 1.

Daniel Dafoe, A Tour Through the Whole Island of Great Britain, pp. 102-107.

Daniel Roth, "Meet eBay's Worst Nightmare," Fortune 142 (1), June 26, 2000, p. 199.

B. Retail stores October 11, 16, 18

Required websurfing: Amazon, Dell, Pcboost, Z-shops, Yahoo! Shopping, Autobytel, & Wal-mart

PRN Section 9.3.1

"Pricing and Branding on the Internet," Stanford Graduate School of Business Case EC-8

"Disintermediation in the U.S. Auto Industry," Stanford Graduate School of Business Case EC-10

Fiona Scott Morton, Florian Zettelmeyer and Jorge Silva Risso, "Internet Car Retailing," Journal of Industrial Economics, forthcoming.
SECOND LINK

C. Online investing October 23

Required websurfing: E-trade, Schwab, Vanguard, Espn fantasy games

"Broker.com" Stanford Graduate School of Business Case EC-13

D. Portals and search engines October 30, November 1, 6

Required websurfing: Yahoo!, MSN, AOL, Dealtime, Pricewatch, Orbitz, Travelocity

Erin White, "No Comparison. Shopping ‘bots’ were supposed to unleash brutal price wars. Why haven’t they," Wall Street Journal, October 23, 2000.

Michael Baye and John Morgan, "Price Competition in the Small and in the Large: Evidence from an Internet Price Comparison Site," mimeo.

Eric Clemons, Il-horn Haan and Lorin Hitt, "The Nature of Competition among Online Travel Agents: An Empirical Investigation," mimeo.

Franklin Fisher and Kevin Neels, "Estimating the Effects of Display Bias in Computer Reservation Systems," Microeconomics: Essays in Theory and Applications, ed. Maarten-Pieter Schinkel, (Cambridge University Press: Cambridge, UK: 1999) Chapter 28, pp. 450-483.

E. B-to-B Ecommerce Nov. 8, 13

David Lucking-Reiley and Daniel F.Spulber, "Business-to-Business Electronic Commerce," mimeo

Edward Robinson, "Battle to the Bitter End", Business 2.0, July 11, 2000.

Luis Garicano and Steven N. Kaplan, "The Effects of Business-to-Business E-commerce on Transaction Costs," mimeo.

Paul Milgrom, "An Economist’s Vision of the B-to-B Marketplace," Perfect.Com White Paper, August 2000.

Jason Anders, "Yesterday's Darling: Business-to-Business Sites Replaced Consumer Sites as the Hot Way to Go. Things have gotten considerably cooler," Wall Street Journal, October 23, 2000, R8.

Edward Robinson, "Battle to the Bitter End (to-End): Ariba and Commerce One are Placing Big Bets on Competing Visions of the B-to-B Economy," Business 2.0, July 11, 2000.
 

F. Copyrights and Napster Nov. 15

Required websurfing: napster, gnuttela

A&M Records and Co-Plaintiffs v. Napster, Inc. Ruling from United States District Court Northern District of California.

Napster Inc. v. A&M Records and Co-Plaintiffs-Appellees. United States Court of Appeals Ninth Circuit. Appellant Napster, Inc.'s Opening Brief

Expert Report of Robert E. Hall, witness for Napster, Inc.

G. Akamai and Content Distribution Nov. 20

H. Topic TBA Nov. 27
 

IV. Asset Pricing Bubbles Two lectures Nov. 29, Dec. 4, H Chapter 13

Charles MacKay, Extraordinary Popular Delusions and the Madness of Crowds. 1852, Chapters 1-3.

Olivier Blanchard and Mark Watson, "Bubbles, Rational Expectations and Financial Markets," Harvard Institute of Economic Research Discussion Paper 877, 1982.

                    Peter M. Garber, "Tulipmania," Journal of Political Economy 97, 535-560, 1989.

                    Homer Vanderblue, " The Florida Land Boom," The Journal of Land and Public Utility Economics 3 (2) (May 1937), excerpt pp. 120-125.

                    N. W. Posthumus, " The Tulip Mania in Holland in the Years 1636 and 1637, Journal of Economic and Business History 1 (3) (May 1929),
                    pp. 434-466 (excerpt 438-439, 444).

V. Macroeconomic Effects Two lectures Dec. 6, 11

Robert W. Fogel, "Railroads as an Analogy to the Space Program," in Bruce Mayzlish (ed.) The Railroads and the Space Program. An Exploration in Historical Analogy, MIT Press, 1965.

Eric Brynjolfsson, "The Productivity Paradox of Information Technology: Review and Assessment,"Commmunications of the ACM, 1993.

Robert J. Gordon, "Does the `New Economy' Measure up to the Great Inventions of the Past," mimeo.

David H. Autor, "Wiring the Labor Market," mimeo.
 

14.27 Policies
  1. Problem sets are designed to help you learn how to apply the material presented in lectures and recitations. You are permitted to discuss course material, including homework, with other students in the class. However, you must turn in your own individual solutions to each homework set.  Discussion with others is intended to clarify ideas, concepts, and technical questions, not to derive group homework set solutions. Identical homework set answers (especially when the steps used to derive answers are not shown or when questions of interpretation are involved) violate this policy and may receive no credit.
  2. Handwritten solutions are fine, as long as they are legible and neat.  Please remember: if we can't read it, we can't grade it.
  3. In fairness to students who complete assignments on time, late homework sets will not be accepted. You may turn in assignments during the lecture on the day they are due. After the lecture, assignments may be placed in a designated box that will be set out outside E52-201 until 4:00 p. m. Do not leave assignments in the professor or T. A.'s office or mailbox.
  4. Taking the midterm is a requirement of the course. Missing the midterm without a valid excuse will result in a failing grade for the entire course.To be considered valid, an excuse must be proffered prior to the exam that is to be missed, if at all possible. The excuse must be in writing, and it must be verifiable. These criteria are necessary, not sufficient, however. I reserve the right to deem an excuse meeting the above criteria invalid. If a student does have a valid excuse I reserve the right to decide to give a written make-up, to give an oral make-up exam or to give no make-up exam and put extra weight on the problem sets and final exam.
  5. All requests for regrades must be submitted in writing within one week of the exam being handed back.
 
Cheating or academic dishonesty in any form will not be tolerated and will result in swift punitive action. This includes but is not restricted to copying information from other students' exams, communicating with other students during exams, failing to follow the rules of the exams regarding notes, calculators, etc., altering an exam for the purpose of a regrade, and producing fraudulent written excuses. Any student found to have cheated or behaved unethically or dishonestly will be given a grade of F on the exam involved and referred to the appropriate disciplinary committees within MIT for further action.