Russel Cooper, Gary Madden, Ashley Lloyd & Michael Schipp The Economics of Online Markets and ICT Networks

Communications & Strategies, Oct, 2006 by Michel Volle

Russel COOPER, Gary MADDEN, Ashley LLOYD & Michael SCHIPP (Eds)

The Economics of Online Markets and ICT Networks Physica-Verlag, Contributions to Economics Series, Heidelberg, 2006, 267 pages

The contributions brought together in this book are representative of the current state of the economy of ICTs: They effectively cover all of its key aspects including:

--The relative importance of sunk costs, leading to a cost function with increasing returns and an economic equilibrium under the regime of monopolistic competition;

--product differentiation, leading to the correlating segmentation of demand;

--partnerships aimed at bundling the different functions necessary to provide a product, each partner playing its hand in the game;

--the structure, in solidary layers, of the physical and semantic platform on which differentiation is based;

--regulation, constraining operators to specialise and respect public service obligations, which is equivalent to real options (that is to say non financial options) which involves costs because a regulated operator is obliged, for instance, to provision non profitable areas and to continue to serve loss-making clients.

The models that are consequently mobilized--Hotelling's main street, Black and Scholes, theory of games, layer models etc.--form the panoply of the economist specialising in ICTs. In order to understand one of the articles that refers to these models, the reader has to have already used them and what is more, to have assimilated the notations and abstractions that the author's argument is based upon. As a result, this is not a book for laymen, at least not if the reader wishes to really understand the author's intentions, the processes he uses and the scope of his results, rather than just superficially skimming through the text.

It is a pleasure to see experts closely examine ICT theory with the appropriate tools, specialist tools whose scope and importance should grow in proportion to the position occupied by ICTS in the economy. However, if one were to speak with corporate and political strategists, even in the front line of decision-making, one would discover that they are not aware of these tools. If one were to mention monopolistic competition, for example, to such individuals they would stare in astonishment, because they are used to opposing the concepts of competition and monopoly, valorising the former to denigrate the latter or, (far more rarely) vice-versa. So a term in which competition is used as the noun and monopoly as an adjective is beyond them.

Of course, these practitioners did not wait for theoretical backing to take action and the best of them have been able to shape their views by learning from experience. However, it is significant that the theory to which legislators refer when they lay down regulations, theory in practice, is obsolete and that a gap has consequently emerged between political aims and the discourse of the media on the one hand, and the practices of the most intelligent players and most enlightened theory on the other. Such a discrepancy inevitably paves the way for the opportunist tactics of predators that capitalise on the shortcomings of the legal system and the violence that is endogenous to monopolistic competition.

Somebody with the eloquence, social skills and repartee of a man like Keynes would be needed to get the results of this theory into the heads of strategists. In the absence of a great communicator, this theory remains a matter for specialist economists. As these experts compete amongst themselves, a battle in which mathematical sophistication is an effective weapon, the inflation of formalism and the exhibition of equations inhibit communication--all the more so given that some results would appear to contradict the staples of economic science, hitherto believed to be firmly established principles (such as the efficiency, always and everywhere, of pure and perfect competition).

The mathematics used by John Hicks was no less deep or subtle than that adopted by our specialists, but it was elegant enough not to expose the formal framework that its argument was based upon. Once you have spent entire days, pencil in hand, following the meanderings of a round-about demonstration of a theory which, in the end, is quite simple, it makes you nostalgic for an era when economists were able to show their readers shortcuts. The unwieldiness of formalism can, moreover, mask a certain simplicity in the recourse to models. The "Hotelling's main street," for example, uses a geographical metaphor: clients are spread across a continuous line, the offering is located at several points along this line and the utility of a product for a client is a function of his/her distance from the point at which this product is offered. A natural monopoly is consequently created for each offering in an open space with this point at its centre (or in a corner) and competition on its borders. However, to fully appreciate the implications of this metaphor, it has to be removed from a geographical space and extended to the abstract space of the service offering, a space in which the user is constantly located at the point representing the product that s/he needs, the utility of an offering decreasing as a function of its distance from this need--and to extend it in time too, the temporary monopoly being, far more than competition, the driver of innovation.