MA Economics of Information and Internet

1       Description:

This unit deals with the economics of the production and distribution of information goods on the Internet. We will analyse the production, pricing and distribution of products that are mainly informational in nature, such as software and news. We will also study the structure and functioning of Internet-mediated markets, as well as models of production that are specific to the Internet.

Lectures (2 hrs/week)

  1. Information goods: pricing, bundling, versioning, sampling,
  2. Models of consumer search for goods and information
  3. Intermediation, network effects and platform
  4. Open source software and the collaborative production of information

Exercises (2 hrs/week)

Exercises will focus on analysing specific aspects of the strategies of a range of Internet companies, as explained in recent published academic articles. We will study articles from the reading list. We will also solve a few formal models for concepts dealt with in the course.

2       Recommended books

  1. “Information Rules: A Strategic Guide to the Network Economy.” By Carl Shapiro and Hal Varian, 1999, Harvard Business School (“Shapiro & Varian” hereafter)
  2. “Matchmakers: The New Economics of Multisided ” By David Evans and Richard Schmalensee, 2016. Harvard Business Review Press, (“Evans & Schmalensee” hereafter)
  3. “The Success of Open ” By Stefan Weber, 2004. Harvard University Press. (“Weber” hereafter)

3       Evaluation:

  1. Essay: 10 pages (pass or fail), consisting in a case study of a firm that is involved in the production and distribution of information goods on the Internet (see additional instructions).
  2. Final Exam: 90mn, consisting in a mix of knowledge and reflection questions (see mockup exam and exam from last year).

4       Language:

Lectures and exercises will be in English, essays can be written in German.

5       Dates & Locations:

  1. Lectures: Wednesday: 10:00 – 12:00, weekly (from 10.2017)
    • Location: Raum 0.136, Gebaeude Theologicum: Pl. d. Go¨ttinger Sieben 2
  1. Exercises: Thursday: 16:00 – 18:00, weekly (from 10.2017)
    • Location: Raum 0.136, Geba¨ ude Theologicum: Pl. d. Go¨ttinger Sieben 2
  1. Exam: Wednesday 02.2018 from 10.00 to 12.00 Uhr.
    • Location: Raum ZHG 006

6       Outline:

6.1      Introduction, context, definitions, goals and structure of the course

  • Keywords: Fixed and marginal costs, non-rivalry, excludability, reproducibility, private and public
  1. Ch. 1 Shapiro & Varian

6.2      Definitions and economic issues with information goods

  • Keywords: Search, credence and experience goods. Informational asymmetry, the issue with
  1. Nelson, P. (1970). Information and Consumer Behavior. Journal of Political Economy, 78(2), 311-329.
  2. Akerlof A. (1970). The Market for ” Lemons”: Quality Uncertainty and the Market Mechanism, The Quarterly Journal of Economics, 84(3), 488-500,

6.3      Pricing information goods

  • Keywords: bundling, versioning, subscription per-use fees.
  1. Ch. 2 and 3 Shapiro & Varian
  2. Varian, R. (1996). Differential Pricing and Efficiency. First Monday, 1(2).
  3. Bakos,, & Brynjolfsson, E. (1999). Bundling Information Goods: Pricing, Profits, and Efficiency. Management Science, 45(12), 1613-1630.

6.4      Marketing information goods

  • Keywords: consumer search, the role of experts, recommendations, repeat buying, certification, guarantees, samples (demos),
  1. Lizzeri, (1999). Information Revelation and Certification Intermediaries. The RAND Journal of Economics, 30(2), 214-231.
  2. Baye, R., & Morgan, J. (2001). Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets. American Economic Review, 91(3), 454-474.
  3. Ellison, , & Ellison, S. F. (2009). Search, Obfuscation, and Price Elasticities on the Internet. Econometrica, 77(2), 427-452.
  4. Gaudeul (2010). Software marketing on the Internet: the use of samples and repositories, Economics of Innovation and New Technology, 19(3), pp. 259-281,

6.5     Internet auctions and advertising

  • Keywords: first price, second price auctions, winners’ curse, search engine placement
  1. Steiglitz, (2007). ” English and Vickrey Auctions”, Ch. 1 of ” Snipers, Shills, and Sharks: eBay and Human Behavior”,
  2. Bajari, P., & Hortac¸su, (2004). Economic Insights from Internet Auctions. Journal of Economic Literature, 42(2), 457-486.
  3. Athey, S., & Ellison, G. (2011). Position Auctions with Consumer Searc The Quarterly Journal of Economics, 126(3), 1213-1270.

6.6     Network goods

  • Keywords: compatibility, critical mass, coordination, bandwagon effect, lock-in, winner takes all
  1. Ch. 7 Shapiro & Varian
  2. Katz, L., & Shapiro, C. (1985). Network Externalities, Competition, and Compatibility. The American Economic Review, 75(3), 424-440.
  3. Besen, M., & Farrell, J. (1994). Choosing How to Compete: Strategies and Tactics in Standardization. Journal of Economic Perspectives, 8(2), 117-131.
  4. Shapiro, , & Varian, H. R. (1999). The Art of Standards Wars. California Management Review, 41(2), 8-32.
  5. The QWERTY (1999, April). The Economist.
  6. Farrell, , & Klemperer, P. (2007). Chapter 31 Coordination and Lock-In: Competition with Switching Costs and Network Effects. In M. A. and R. Porter (Ed.), Handbook of Industrial Organization (Vol. 3, pp. 1967-2072). Elsevier.

6.7     Two-sided markets

  • Keywords: intermediaries, externalities, chicken and egg, divide and conquer, cross-subsidies
  1. Part 1, Evans and Schmalensee
  2. Rochet, -C., & Tirole, J. (2003). Platform Competition in Two-Sided Markets. Journal of the European Economic Association, 1(4), 990-1029.
  3. Jullien, (2011). Competition in Multi-sided Markets: Divide and Conquer. American Economic Journal: Microeconomics, 3(4), 186-220.

6.8     Big data, consumer targeting and privacy

  • Keywords: Consumer targeting, advertising, personalization, personal information
  1. Acquisti, , Brandimarte, L., & Loewenstein, G. (2015). Privacy and human behavior in the age of information. Science, 347(6221), 509-514.
  2. Acquisti, , John, L. K., & Loewenstein, G. (2013). What is privacy worth?. The Journal of Legal Studies, 42(2), 249-274.

6.9      Online social network: development dynamics and management.

  • Keywords: social media, blogging, private regulation, reciprocation, online communities, networking, filtering of information
  1. Boyd, D. , & Ellison, N. B. (2007). Social Network Sites: Definition, History, and Scholarship. Journal of Computer-Mediated Communication, 13(1), 210-230.
  2. Jackson, Matthew and Asher Wolinsky (1996). “A Strategic Model of Social And Economic Networks.” Journal of Economic Theory, 71, 44–74,
  3. Granovetter, S. (1973). The Strength of Weak Ties. American Journal of Sociology, 78(6), 1360–1380.
  4. Gaudeul and C. Giannetti (2013): The role of reciprocation in social network formation, with an application to LiveJournal, Social Networks, 35(3), pp. 317-330,

6.10      Software design, development and licensing

  • Keywords: public good, private development of public goods, copyright, interfaces, testing, documentation, interfaces, code re-use and maintenance
  1. Ch. 1, Weber.
  2. Besen, M., & Raskind, L. J. (1991). An Introduction to the Law and Economics of Intellectual Property. The Journal of Economic Perspectives, 5(1), 3-27.
  3. Varian, R. (1993). Economic incentives in software design. Computational Economics, 6(3-4), 201-217.

6.11      Open-source development

  • Keywords: copyleft, signalling, commons, free software, BSD license, GPL, proprietary, public domain
  1. Ch. 2 & 3, Weber.
  2. Raymond, S. (1998). The cathedral and the bazaar. First Monday, 3(2).
  3. Benkler, (2002). Coase’s Penguin, or, Linux and The Nature of the Firm. The Yale Law Journal, 112(3), 369-446. papers/3126/
  4. Lerner,, & Tirole, J. (2002). Some Simple Economics of Open Source. The Journal of Industrial Economics, 50(2), 197-234.
  5. Johnson P. (2002). Open Source Software: Private Provision of a Public Good, Journal of Economics & Management Strategy, 11(4), 637-662,
  1. Gaudeul (2007). Do Open Source Developers Respond to Competition?: The LATEX Case Study, Review of Network Economics, 6(2), 239-263,

6.12      Wrap-up: What did we learn, what did we forget, and what didn’t we understand?