- Email: [email protected]
Architecture and economic policy
Telecommunications Policy, Vol. 20, No. 3, pp. 161-167, 1996
Pergamon S0308-5961 (96)00005-5
Copyright © 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0308-5961/96 $15.00 + 0.00
Architecture and economic policy
Marjory S Blumenthal
The Internat is a passion for network technologists and a puzzle for economists. Each dleclpllne needs to understand more of the thinking of the other to advance, but achieving that goal has been slow and difficult. Four papers were developed to further interdlacb pllnary analysis in the context of the 1995 Telecommunications Policy Research Conference. As explained below, it i$ hoped that this set of papers will advance telecommunioatlons policy analysis by clarifying the nature of the Internet--in perticular, the nature and Implications of Its architecture~ and by framing economic questions based on that characterization, provldIng a foundation for further research. Copyright © 1996 Elsevier Science Ltd. The author is Director of the Computer Science and Telecommunications Board, National Research Council/National Academies of Sciences and Engineering, 2101 Constitution Avenue, NW - HA 560, Washington, DC 20418, USA (Tel: +1 202 3342605; fax: +1 202 3342318; email: [email protected]).
1Theauthor is grateful to David D Clark of MIT for comments on an early draft of this introduction. 2Dudng 1994-1995, as public interest in the Internet grew, veteran segments of the Internet-using community were periodically alarmed by rumors of impending regulation and actual discussion of potential regulation associated with US congressional debates over telecommunications reform legislation and various proceedings and less formal activities at the US Federal Communications Commission. The duration and progress of measures to 'regulate' obscenity on the Intemet suggested to many that more government intervention continued on page 162
Introduction A set of papers on the economics of the Internet and the ideas behind this introduction to them 1 were prepared for a cross-disciplinary panel at the 1995 Telecommunications Policy Research Conference. They were motivated by the recognition that expertise in economics and computer network technology (and other aspects of computer science) must be combined to assess how the industrial base for information infrastructure is evolving and options for relevant competitive strategy and public policy. Achieving that combination is difficult, because the two disciplines differ considerably in their modes of thought and universes of discourse; but the risks of avoiding intellectual crossfertilization may be even greater as the Internet takes hold as a common basis for a more complex, heterogeneous, and functionally rich information infrastructure than previously possible. A number of private and public decisions are being made that raise questions about appropriate designs for technical and public policy mechanisms. An understanding of economic principles and processes can drive better choices for the design and implementation of technical mechanisms (eg for accounting, or more broadly for the evolving architecture) within the Internet; an understanding of how the technology works can drive better choices for pricing, for possible regulation, 2 and generally for incentives that will affect the behavior of Internet service providers and users. In the early 1990s, the Internet received little attention as a topic of telecommunications policy. The occasional comments it drew from government telecommunications officials and telecommunications executives often reflected inaccurate or unrealistic assumptions about how the Internet works, how it is built and used, and how its components and associated services are paid for. Some of the misunderstanding derived from inappropriate extrapolation from concepts first discussed in the context of telephony (eg integrated services delivered over 'one wire,' intelligent networks). In addition, the relatively small numbers and heavily non-profit nature of the original users naturally limited the spread of information about the Internet. Meanwhile, technologists steeped in traditions associated with the early Internet 3 railed blindly against emerging proposals for Internet 161
Architecture and economic policy: M S Blumenthal
pricing, their arguments based on ideology and greater comfort with 'community' rather than 'markets'. These reactions are evidenced by anecdotal reports of discussions in Internet-related technical meetings (eg meetings associated with the Internet Engineering Task Force), a variety of electronic mail-based discussions (eg 'com-priv'), and by implication from the course of development of key elements of Internet technology, most notably the ongoing revision of the core Internet Protocol (IP). Discussions are sometimes clouded by perceptions of the nature and costliness of accounting in the telephone system. External estimates of the cost of telephony accounting tend to be high (and apocryphal), and the relationship between telephony's costs for use and prices for that use tend to be discounted because of the artificial influences of regulation on the level and incidence of charges (eg charges associated with universal service).
continued from page 161 might be possible than previously believed. aThe early Internet benefitted from US government support for backbone network facilities, pursuit of greater speed and bandwidth (eg the US federal National Reseamh and Education Network program established goals of 1-3 gigabits per second speed by the early 1990s and service extension into the scientific and engineering research and education (at all levels) communities. In those communities, access typically was provided through a larger institution that did not disclose or impose specific charges on individual users (although those institutions were paying bills supporting that access). These circumstances led many scientific researchers, in particular, to perceive Internet access as an entitlement. Meanwhile, programs in other countries helped to develop research and education network facilities, services and access around the world, thereby helping to extend the global reach of the Internet. 4MacKie-Mason, J K and Varian, H 'Some economics of the Intemet' Technical report, University of Michigan, Ann Arbor, MI (1993). Paper originally prepared in 1992 for the Tenth Michigan Public Utility Conference at Western Michigan University, 25-27 March 1993. In that early work they argued that 'usage-sensitive pricing is the most promising mechanism for accomplishing prioritization and socially efficient congestion control', noting needs for technical mechanisms to support a system like the one they propose and more generally for flexibility in pricing and congestion control mechanism to accommodate changes in technology. SMacKie-Mason, J K and Varian, H 'Economic FAQs about the Intemet' Journal of Economic Perspectives 1994 8 (3) 75-96; http://www.sims.berkeley.edu/resources/ infoecon/FAQs/FAQs.html SAssociated with that experience was broader development of experience, comfort and know-how relating to information technology in general.
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A brief, idiosyncratic history A few economists began to examine the economics of the Internet during the early 1990s. At the University of Michigan Hal Varian and Jeffrey MacKie-Mason generated a seminal analysis of pricing to avoid congestion (through a 'smart market' in which users indicate maximum willingness to pay as a bid for access and market). 4 Also, borrowing from Internet publishing traditions, they published an article composed of Frequently Asked Questions about Internet economics that was published in a traditional economics journal as well as electronically, a form in which it has been updated. 5 Their efforts contributed to a broadening debate among both economists and technologists via discussion meetings and published analyses (see Table 1). During the early- to mid-1990s, growing commercial activity on the Internet (the rise and differentiation of Internet service or access providers, the growth of individual and organizational accounts on the Internet, the proliferation of on-line services available over the Internet, and so on) transformed the public image of the Internet from a toy for non-profit research, education and library communities to a tool for profit-making across a wide range of service-supplying and -using entities. Attention to the Internet mushroomed in the business and popular media; Internet--and later World Wide Web---addresses proliferated on business cards and in advertisements; and stock offerings of Internet-related businesses reflected a large component of speculation about growth and profit potentials. A major factor driving this activity was the US government's decision to exit from much of the backbone network business, leaving that business to the private sector. The private sector moved in because the early Internet demonstrated possibilities for a number of potentially profitable applications-possibilities for efficiently combining information and communications resources and services. The World Wide Web proved to be an extraordinary application that both enabled other applications and made the Internet more appealing to a wider variety of people and organizations. The Internet's takeoff reflected a number of factors in addition to its own characteristics. For example, telephone and electronic networks had been important parts of business infrastructure for large corporations since at least the early 1980s. 6 As a result, many businesses and individuals who may not have used the Internet had the benefit of considerable experimentation, application development and experience
Architecture and economic policy: M S Blumenthal Table 1. Bridging the gap between disciplines: key foundaUonel activities. Some of the earliest considerations of policy implications of the Internet, including pricing and other issues associated with its commercialization, were undertaken and/or facilitated by attorney Brian Kahin. His efforts, beginning in 1989, contributed to the launch of the Information Infrastructure Policy Program at Harvard University, which has organized a number of workshops and conferences.1° Economist Hal Varian, then at the University of Michigan, helped to broaden consideration of Internet economics among professional economists and telecommunications policy analysts by organizing a small panel session at the autumn 1994 TPRC. That session featured Varian's work with Jeffrey MacKie-Mason on congestion pricing, an analysis of network market development and associated economic modeling by Nicholas Economidas, an overview by this author of pricing and other economic issues arising from the widening spread of advanced information infrastructure, and an outline of telephony and Internet access trends by PadmanabhanSrinagesh, culminating in questions about the implications of the growth of the Internet for industrial organization in telephony.1~ Early Internet pricing analyses were complemented by examinations of the development and adoption of standards associated with networks of different kinds and their interoperation. For example, Marvin Sirbu, a technologist at Carnegie Mellon University, built from a basis of computing and communications standard-setting examinations in the 1980s to analysis and development, in an interdisciplinary context, of mechanisms and systems to assess and collect charges for intellectual property and other electronic commerce transactions. Joe Farrell at the University of California at Berkeley is among a small group of economists to address the broad set of economics issues associated with standards for computer-based systems, including the Internet.~2 This work addresses the cost and industrial organization aspects associated with interoperability and the interaction between standard-setting processes and the nature and number of resulting standards. In 1994-1995, a few meetings intended to foster greater interaction among network technologists and economists took place. A consortium of US government agencies (the Technology Policy Working Group of the inter-agency Information Infrastructure Task Force) sponsored (and Kahin organized) both a June 1994 workshop on information infrastructure standards issues and a July 1994 workshop (plus a July 1995 follow-up workshop) intended to motivate more economics research associated with Intemet and broader information infrastructure economics. A March 1995 workshop organized by Lee McKnight and the MIT Research Program on Communication Policy13engaged more technologists than the TPWG sessions, generating more discussion of how Internet technology works and is evolving. Also in 1995, the Organization for Economic Cooperation and Development began to plan a series of international cross-disciplinary meetings to address the economics of the information economy, including Internet-related issues. At the US National Research Council, the Computer Science and Telecommunications Board (CSTB) has explored the nature, directions and economic implications of the Internet and other networks through a series of projects leading to several reports, most notably the 1994 Realizing the Information Future: The Internet and Beyond.TM That report's comprehensive technical assessment of open and integrated information infrastructure, embodying fundamental features found in the Internet, provides a point of departure for assessing several associated public policy, including pricing, issues,is The CSTB efforts involve sustained interaction among heterogeneous panels of experts, augmented by rigorous peer review. That process of sustained interaction motivated the author to attempt a similar process on a smaller scale and with more emphasis on economic issues, resulting in the 1995 TPRC panel.
7For example, national and multinational companies routinely used networks to exchange information among dispersed units for such purposes as tracking and analyzing sales performance, rationalizing purchasing, facilitating payroll and other internal accounting, supporting sales forces in a variety of field contexts, enhancing order processing and customer service, and so on. Electronic data interchange (EDI) and other so-called interenterprise communication applications encouraged companies to communicate with external parties and to adjust their approaches to internal data, information, and communications to accord with external information sharing requirements. 8Since 1972, the TPRC series has served as a forum for discussion of economic and legal policy issues in telecommunications, including domestic and international perspectives and reviews of recent and ongoing research. In 1995, the broader TPRC program featured presentations on conventional network economics, including contrasts and interconnections between cable and telephony environments. ~'l'he Internet, of course, was the principal medium of communication for establishing the panel, considering alternative participants and themes, posing issues for consideration, assuring sufficient differentiation and complementarity, exchanging evolving outlines and drafts and comments on same, and attending to administrative aspects of panelist and paper preparation. This network-mediated collaboration continued on page 164
associated with electronic networking and various combinations of telephone and computer systems (eg 800-number telephone services supported by sophisticated product and customer databases, specialized on-line bibliographic database services, and national or multinational private corporate data and voice networks). 7 The Internet broadened the actual and potential networking constituency and demonstrated new possibilities for open and interorganizational communication (as opposed to closed private networks or integrated sets of services offered by a single provider). 'Electronic commerce' became a new buzzword in the mid-1990s, underscoring the growing value attached to Internetstyle networking as a business or business tool. These and related trends made understanding the economics of the Internet a more practical and urgent concern. The autumn 1995 TPRC was ideally timed to further the analysis, s The TPRC Internet economics panel was distinguished by the active cross-disciplinary interaction that shaped the individual papers, discussant presentations and panel discussions. 9 Each of the papers involved inputs from both network technologists and economists; three (MacKieMason et al, Lehr and Weiss, and Shenker et al) were developed by technologist-economist teams, one by a technologist with some review input informed by economics (Clark), and all were exchanged among the panelists (paper authors and discussants) for preliminary reactions. The papers were complemented by informal presentations by two discussants: Craig Partridge, a computer scientist with Bolt Beranek and Newman, who collected and analyzed data on the apparent business strategies and financial performance of Internet service providers, and Padmanabhan Srinagesh, an economist with Bell Communications Research, both presented highlights from relevant technical work at Bellcore and commented on the key economics issues. 163
Architecture and economic policy: M S Blumenthal
What is special about the Internet continued from page 163. resulted in a set of papers and discussant The central technological issue in Internet economics is network presentations that was more complete than those typical of many of the earlier architecture. By design, the Internet is very different from the teleworkshops that considered similar issues phone network. As Clark and Shenker et al explain, it uses its (see Table 1). l°Kahin published a discussion paper at underlying physical facilities very differently (for example, there is no Harvard in 1989 entitled 'The NREN as a equivalent to a 'telephone call') and, historically, more efficiently quasi-public network' and organized a through statistical multiplexing of traffic from multiple users via packetworkshop on commercialization of the Internet in March 1990, which led to the switching. These characteristics affect the cost of Internet service. Internet RFC 1192. Another characteristic, which also relates to cost, is the nature of the 11Vadan, MacKie-Mason, and Economides , service, Unlike circuit-switched telephony, which commits a fixed established World Wide Web sites during 1994-1995 that feature articles, biblio- allocation of capacity to each user for the duration of a call, the graphies, and other information relating to Internet's 'best effort' service allows for automatic adjustment of the Internet economics. Varian's site at the quality of service in response to traffic load or other conditions, which University of Berkeley (www.sims.berkeley. means, for example, that transmission of a data file of a given size may edu), like the one established with MacKieMason at the University of Michigan take longer under some circumstances than under others. Congestion or (www.spp.umich.edu), reflects his current excessive load relative to capacity has been the principal factor in broad mission to foster the study of the 'information economy'; Economides' transmission delay; the Internet architecture yields negligible marginal ([email protected]; edgar.stern. cost in the absence of congestion, leading to exploration of technical and nyu.edu/networks/biblio.html) has included pricing mechanisms to discourage 'excess' use that might lead to an 'interactive bibliography' on the economics of networks for which he has solicited congestion. entries. Alok Gupta and his colleagues at Clark's proposal for pricing based on expected capacity combines the University of Texas at Austin Center for systematic incorporation of expectations for average bandwidth and Information Systems Management have a Web site (www.cism.bus.utexas.edu) on traffic burstiness with agreements between network service providers the economics of the Intemet and electro- and customers or interconnected providers for prioritization of traffic. nic commerce. Like previous proposals to implement a priority-based pricing scheme, ~2See, for example, Farrell, J and Shapiro, C 'Standard-Setting in High-definition it reduces the randomness of the incidence of congestion. 16 As Clark Television' in Baily, M N and Winston, C and Shenker et al make clear, however, Internet pricing schemes will (eds) Brookings Papers on Economic take effect in a system contextPthe Internet--that is highly automated. Activity: Microeconomics Brookings InThe Internet is designed and implemented in ways that incorporate stitution, Washington, D.C. (1992). Farrell, who has also addressed the economics of assumptions about user behavior, limiting expectations for or accomintellectual property protection and the in- modation of direct, ad h o c or atypical expressions of user preferences. tersection of standards-setting and intellectual property protection, became the Of course, better understanding of demand and good engineering Chief Economist at the US Federal Com- together may lead to mechanisms that avoid these limits as much as munications Commission in early 1996. possible. 13McKnight, L W and Bailey, J P (eds) Neither Internet architecture nor Internet traffic patterns/demand is 'lnternet economics' Journal of Electronic fixed. On the traffic/demand side, enhanced capabilities for using the Publishing 1996, in press. ~4Realizing has generated consider- Internet for voice and video traffic imply requirements for more able discussion in the community of Internet technologists and in US information predictable quality of service than that of best effort; support for infrastructure policy circles. It is comple- alternative qualities of service is being developed through evolution of mented by The Changing Nature of the Internet protocols. On the architecture side, support for more Telecommunications/Information Infrastructure (1995), Keeping the US Computer collection of accounting information, necessary to support billing reand Communications Industry Competi- lated more directly to actual use, is under consideration. Within the tive: Convergence of Computing, Com- Internet Engineering Task Force (IETF), interest in issues relating to munications, and Entertainment (1995), and The Unpredictable Certainty: Informa- pricing has been increasing, and there is a working group considering tion Infrastructure Through 2000 (1996). issues in accounting. Also emerging is support for greater protection of All are published by the National Academy privacy, security, and intellectual property rights---protections that may Press, Washington, DC 15See Blumenthal, M S 'Realizing the in- increase demand for Internet service and that, in combination with pricing, may be a basis for competitive differentiation. formation future: technology, economics, and the open data network' in Brock, G W Multicast service, which can use the Internet more efficiently by (ed) Toward a Competitive Telecomallowing one transmission into the net to be replicated inside the net as munication Industry: Selected Papers from the 1994 Telecommunications Policy Re- appropriate to reach a number of recipients, is evolving. Shenker et al search Conference, Gerald W. Brock, edi- note that pricing can encourage the use of multicast where it may be tor, 275-287 Lawrence Erlbaum Associmore efficient, but that current multicast routing technology may need ates, Mahwah, NJ (1995) continued on page 165 to be complemented by additional accounting mechanisms to support 164
Architecture and economic policy: M S Blumenthal
billing. Multicast elevates concerns about flexibility in charging: does the technology provide support for charging receivers as well as senders, and in what way? Similarly, fast-growing traffic on the World Wide Web overlay to the Internet has led some technologists to advocate distributing and storing popular information resources in multiple sites to conserve bandwidth and reduce congestion risks, another prospect for which pricing can provide incentives.
Internet economics
continued from page 164 16Hal Varian notes in a personal communication that through several electronic mail discussions, he and David Clark appear to have converged on this thinking.
The economic issue that has received the most attention to date is pricing; under that category, the dominant topic has been pricing to minimize network congestion. This issue is addressed by Clark, Shenker et al, and Lehr and Weiss. Discussions among economists and technologists including conditions such as congestion that inform desirable pricing regimes---and associated technical mechanisms--can help to achieve a more sophisticated pricing debate within the Internetdeveloping and -using communities. To this point, debate can be caricatured as a choice between access-based (subscription) and usagebased charges, with large-scale users fearful of large usage-based bills. Shenker et al call for estimating expected congestion as a basis for local charging at the access point (taking account of the destination) in a scheme they call 'edge pricing'; Clark calls for estimating network capacity, noting that such estimates are not guarantees but might be useful for user decision-making. Symptomatic of the challenges of cross-disciplinary analysis, it should be noted that the treatment of key assumptions varies with the backgrounds of the authors. Reflecting computer science/engineering perspectives, Clark and Shenker et al argue for using expected-value estimates as pragmatic tools for decision making under uncertainty, while MacKie-Mason et al and Lehr and Weiss, drawing more from the traditions of economics, present certain assumptions as potentially over-simplifying parameters. Lehr and Weiss, for example, assume a competitive market and point to the challenge of adapting their analysis to account for market power among Internet service providers (ISPs). According to data on actual industry trends presented by Partridge as a discussant, such market power is a real prospect. Industrial organization--including the traditional dimensions of industry structure, conduct a , d performance--is another fundamental concern of the economics of the Internet. Because of its open and layered architecture, the Internet has an evolving and uncertain role as a common foundation for internetworking among a variety of network service providers and private networks. As such, it affects traditional telecommunications providers who may supply facilities or access services or may face competition from others who do. It is also driving the growth of new kinds of businesses that provide higher-level services (eg access to specialized information repositories, multi-player games) or ancillary middle-level services (eg information resource directories, additional protections of privacy and security) that build on basic telecommunications services. This business layering raises questions about economies of scale and scope, vertical and horizontal integration and competition, the sustainability of the lower-level businesses based primarily on capital-intensive, physical communications facilities, and the economics and business aspects of interconnecting both facilities and services. The 165
Architecture and economic policy: M S Blumenthal
questions are so numerous and the context so dynamic that the amount of speculation greatly outweighs the amount of analysis to date. Lehr and Weiss highlight the issue of internetwork settlements, noting the existence of information asymmetries and the opportunities for strategic manipulation of prices. Issues relating to network interconnection are also touched on by Clark and Shenker et al. MacKie-Mason et al posit a distinction between architectures that are 'aware' of the kind of traffic they support and others that are 'blind'. They relate architecture to incentives for market entry and diversity in networkdelivered content. Their analysis raises questions about how costs relating to content arise and how both architecture and pricing combine to influence exPerimentation, or even an excess of content ('clutter'), that may be. made available via networks. Their discussion of the relationship among supply of content, supply of more basic network services, and network architecture underscores the difference between an information infrastructure and the simpler concept of telecommunications infrastructure. It points to the need for joint examination of network economics and the economics of content supply in networked environments (including pricing, incentives and quality aspects, and incorporating comparisons or contrasts between television and other conventional entertainment programming and software-based service programming such as database access, message-exchange, and games and other multi-user interaction activities). Industrial organization concerns lie at the heart of questions raised by Srinagesh about asset-stranding and the sustainability of facilitiesdominated telecommunications businesses in his 1994 TPRC paper, 17 as well as in the context of the 1995 panel. He expanded on this theme in a paper prepared for the CSTB NII 2000 project. Noting different categories of ISPs, themselves displaying different degrees of layering depending on whether they own their own facilities, Srinagesh and co-author Gong observe that 'the layered structure of data communications services leads to a recursive relationship in which the cost structure of services provided in any layer is determined by prices charged by providers one layer below.' They ask: 'Can ISPs with varying degrees of integration coexist in an industry equilibrium, or are there definite cost advantages that will lead to only one kind of firm surviving in equilibrium? 'is During the TPRC panel discussion, data presented by Partridge on the range of ISPs show that today, and for at least the short term, variation is significant. Finally, it is worth noting, as the data presented by Partridge as a discussant attest, that many of the costs actually incurred in the provision of Internet service are not related to bandwidth. Publicly available mid-1995 data from several ISPs suggest that bandwidth accounts for about 30-35% of their costs, a share that is declining; such 17Srinagesh, P 'lnternet cost structures costs are incurred early by ISPs in their efforts to build points of and interconnectionagreements' in Brock, G W (ed) Toward a Competitive Telecom- presence and gain market position. Rather, Partridge suggests (consismunication Industry: Selected Papers from tent with Srinagesh's observations at the 1994 TPRC) that dominant the 1994 Telecommunications Policy Research Conference 251-273 Lawrence costs reflect marketing, customer support, and other complements to Erlbaum Associates, Mahwah, NJ (1995) the actual delivery of service over the Internet. These data are com18Gong, J and Srinagesh, P 'The econoplemented by anecdotal reports on market experiments by cable and mics of layered networks' white paper pretelephony service providers, which underscore how dynamic and uncerpared for Computer Science and Telecommunications Board. (1996); The Unpredict- tain the market is and how aggressive service providers must be to gain able Certainty: Information Infrastructure customers. Together, these data are but one of many factors that bind Through 2000 National Academy Press, the relationship between price and cost in the Internet arena. Washington, DC (1996)
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Architecture and economic policy: M S Blumenthal
Next steps: directions for future research As the above overview is intended to illustrate, Internet mechanisms are evolving to help match services to demand, while pricing is attracting growing interest as a vehicle for influencing both demand and design of available mechanisms. What don't we already know that we need to understand about viable pricing regimes? How much more do economists and the larger community engaged in the study or implementation of regulation need to know about the way the Internet works? Several issues come to mind as a result of discussions at the 1995 TPRC and through the author's relevant work at CSTB. These include: • How can the analysis of network and content economics be jointly advanced? How can these analyses be better integrated with assessment of applications of information infrastructure in specific contexts, such as electronic publishing and electronic commerce? • How can both theoretical (eg welfare and optimality analysis, assessment of regulatory concepts) and empirical (eg industrial organization trends, market experimentation experiences) analyses best advance? • How can technological, business/strategic and economic assessments of the layered information infrastructure be best integrated? Perspectives from network economics, industrial organization and game theory, and network architecture and other subdisciplines of computer science should continue to be brought together to assure sufficient realism and comprehensiveness. • What is the basis for deciding which among alternative accounting mechanisms is preferable? That is, how can economists advise those who are advancing Internet technology--given uncertainty and experimentation in the market? Finally, it is the author's observation that better demand modeling and analysis is essential for understanding the welfare consequences of pricing and predicting results from alternative strategies. What is it that users value, how much, and how much do their valuations vary? Given user behavior, what does growing use of a highly automated system such as the Internet imply for market performance as well as structure? As illustrated by the 1995 TPRC Internet economics panel, both technologists and economists make assumptions about what people who use the Internet want, how those preferences may affect willingness to pay, and the incentive effects of alternative pricing schemes. The design of technical mechanisms is predicated on assumptions about what users want to do, which in turn reflects both technical capabilities and pricing incentives; altering technical mechanisms is time-consuming and expensive, inasmuch as it requires design and implementation agreements among a growing number of diverse parties. The basis for today's assumptions is limited; systematic collection and analysis of crosssectional and longitudinal data could go far in helping to illuminate Internet markets, gauge future developments and inform associated policy options.
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Pergamon S0308-5961 (96)00005-5
Copyright © 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0308-5961/96 $15.00 + 0.00
Architecture and economic policy
Marjory S Blumenthal
The Internat is a passion for network technologists and a puzzle for economists. Each dleclpllne needs to understand more of the thinking of the other to advance, but achieving that goal has been slow and difficult. Four papers were developed to further interdlacb pllnary analysis in the context of the 1995 Telecommunications Policy Research Conference. As explained below, it i$ hoped that this set of papers will advance telecommunioatlons policy analysis by clarifying the nature of the Internet--in perticular, the nature and Implications of Its architecture~ and by framing economic questions based on that characterization, provldIng a foundation for further research. Copyright © 1996 Elsevier Science Ltd. The author is Director of the Computer Science and Telecommunications Board, National Research Council/National Academies of Sciences and Engineering, 2101 Constitution Avenue, NW - HA 560, Washington, DC 20418, USA (Tel: +1 202 3342605; fax: +1 202 3342318; email: [email protected]).
1Theauthor is grateful to David D Clark of MIT for comments on an early draft of this introduction. 2Dudng 1994-1995, as public interest in the Internet grew, veteran segments of the Internet-using community were periodically alarmed by rumors of impending regulation and actual discussion of potential regulation associated with US congressional debates over telecommunications reform legislation and various proceedings and less formal activities at the US Federal Communications Commission. The duration and progress of measures to 'regulate' obscenity on the Intemet suggested to many that more government intervention continued on page 162
Introduction A set of papers on the economics of the Internet and the ideas behind this introduction to them 1 were prepared for a cross-disciplinary panel at the 1995 Telecommunications Policy Research Conference. They were motivated by the recognition that expertise in economics and computer network technology (and other aspects of computer science) must be combined to assess how the industrial base for information infrastructure is evolving and options for relevant competitive strategy and public policy. Achieving that combination is difficult, because the two disciplines differ considerably in their modes of thought and universes of discourse; but the risks of avoiding intellectual crossfertilization may be even greater as the Internet takes hold as a common basis for a more complex, heterogeneous, and functionally rich information infrastructure than previously possible. A number of private and public decisions are being made that raise questions about appropriate designs for technical and public policy mechanisms. An understanding of economic principles and processes can drive better choices for the design and implementation of technical mechanisms (eg for accounting, or more broadly for the evolving architecture) within the Internet; an understanding of how the technology works can drive better choices for pricing, for possible regulation, 2 and generally for incentives that will affect the behavior of Internet service providers and users. In the early 1990s, the Internet received little attention as a topic of telecommunications policy. The occasional comments it drew from government telecommunications officials and telecommunications executives often reflected inaccurate or unrealistic assumptions about how the Internet works, how it is built and used, and how its components and associated services are paid for. Some of the misunderstanding derived from inappropriate extrapolation from concepts first discussed in the context of telephony (eg integrated services delivered over 'one wire,' intelligent networks). In addition, the relatively small numbers and heavily non-profit nature of the original users naturally limited the spread of information about the Internet. Meanwhile, technologists steeped in traditions associated with the early Internet 3 railed blindly against emerging proposals for Internet 161
Architecture and economic policy: M S Blumenthal
pricing, their arguments based on ideology and greater comfort with 'community' rather than 'markets'. These reactions are evidenced by anecdotal reports of discussions in Internet-related technical meetings (eg meetings associated with the Internet Engineering Task Force), a variety of electronic mail-based discussions (eg 'com-priv'), and by implication from the course of development of key elements of Internet technology, most notably the ongoing revision of the core Internet Protocol (IP). Discussions are sometimes clouded by perceptions of the nature and costliness of accounting in the telephone system. External estimates of the cost of telephony accounting tend to be high (and apocryphal), and the relationship between telephony's costs for use and prices for that use tend to be discounted because of the artificial influences of regulation on the level and incidence of charges (eg charges associated with universal service).
continued from page 161 might be possible than previously believed. aThe early Internet benefitted from US government support for backbone network facilities, pursuit of greater speed and bandwidth (eg the US federal National Reseamh and Education Network program established goals of 1-3 gigabits per second speed by the early 1990s and service extension into the scientific and engineering research and education (at all levels) communities. In those communities, access typically was provided through a larger institution that did not disclose or impose specific charges on individual users (although those institutions were paying bills supporting that access). These circumstances led many scientific researchers, in particular, to perceive Internet access as an entitlement. Meanwhile, programs in other countries helped to develop research and education network facilities, services and access around the world, thereby helping to extend the global reach of the Internet. 4MacKie-Mason, J K and Varian, H 'Some economics of the Intemet' Technical report, University of Michigan, Ann Arbor, MI (1993). Paper originally prepared in 1992 for the Tenth Michigan Public Utility Conference at Western Michigan University, 25-27 March 1993. In that early work they argued that 'usage-sensitive pricing is the most promising mechanism for accomplishing prioritization and socially efficient congestion control', noting needs for technical mechanisms to support a system like the one they propose and more generally for flexibility in pricing and congestion control mechanism to accommodate changes in technology. SMacKie-Mason, J K and Varian, H 'Economic FAQs about the Intemet' Journal of Economic Perspectives 1994 8 (3) 75-96; http://www.sims.berkeley.edu/resources/ infoecon/FAQs/FAQs.html SAssociated with that experience was broader development of experience, comfort and know-how relating to information technology in general.
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A brief, idiosyncratic history A few economists began to examine the economics of the Internet during the early 1990s. At the University of Michigan Hal Varian and Jeffrey MacKie-Mason generated a seminal analysis of pricing to avoid congestion (through a 'smart market' in which users indicate maximum willingness to pay as a bid for access and market). 4 Also, borrowing from Internet publishing traditions, they published an article composed of Frequently Asked Questions about Internet economics that was published in a traditional economics journal as well as electronically, a form in which it has been updated. 5 Their efforts contributed to a broadening debate among both economists and technologists via discussion meetings and published analyses (see Table 1). During the early- to mid-1990s, growing commercial activity on the Internet (the rise and differentiation of Internet service or access providers, the growth of individual and organizational accounts on the Internet, the proliferation of on-line services available over the Internet, and so on) transformed the public image of the Internet from a toy for non-profit research, education and library communities to a tool for profit-making across a wide range of service-supplying and -using entities. Attention to the Internet mushroomed in the business and popular media; Internet--and later World Wide Web---addresses proliferated on business cards and in advertisements; and stock offerings of Internet-related businesses reflected a large component of speculation about growth and profit potentials. A major factor driving this activity was the US government's decision to exit from much of the backbone network business, leaving that business to the private sector. The private sector moved in because the early Internet demonstrated possibilities for a number of potentially profitable applications-possibilities for efficiently combining information and communications resources and services. The World Wide Web proved to be an extraordinary application that both enabled other applications and made the Internet more appealing to a wider variety of people and organizations. The Internet's takeoff reflected a number of factors in addition to its own characteristics. For example, telephone and electronic networks had been important parts of business infrastructure for large corporations since at least the early 1980s. 6 As a result, many businesses and individuals who may not have used the Internet had the benefit of considerable experimentation, application development and experience
Architecture and economic policy: M S Blumenthal Table 1. Bridging the gap between disciplines: key foundaUonel activities. Some of the earliest considerations of policy implications of the Internet, including pricing and other issues associated with its commercialization, were undertaken and/or facilitated by attorney Brian Kahin. His efforts, beginning in 1989, contributed to the launch of the Information Infrastructure Policy Program at Harvard University, which has organized a number of workshops and conferences.1° Economist Hal Varian, then at the University of Michigan, helped to broaden consideration of Internet economics among professional economists and telecommunications policy analysts by organizing a small panel session at the autumn 1994 TPRC. That session featured Varian's work with Jeffrey MacKie-Mason on congestion pricing, an analysis of network market development and associated economic modeling by Nicholas Economidas, an overview by this author of pricing and other economic issues arising from the widening spread of advanced information infrastructure, and an outline of telephony and Internet access trends by PadmanabhanSrinagesh, culminating in questions about the implications of the growth of the Internet for industrial organization in telephony.1~ Early Internet pricing analyses were complemented by examinations of the development and adoption of standards associated with networks of different kinds and their interoperation. For example, Marvin Sirbu, a technologist at Carnegie Mellon University, built from a basis of computing and communications standard-setting examinations in the 1980s to analysis and development, in an interdisciplinary context, of mechanisms and systems to assess and collect charges for intellectual property and other electronic commerce transactions. Joe Farrell at the University of California at Berkeley is among a small group of economists to address the broad set of economics issues associated with standards for computer-based systems, including the Internet.~2 This work addresses the cost and industrial organization aspects associated with interoperability and the interaction between standard-setting processes and the nature and number of resulting standards. In 1994-1995, a few meetings intended to foster greater interaction among network technologists and economists took place. A consortium of US government agencies (the Technology Policy Working Group of the inter-agency Information Infrastructure Task Force) sponsored (and Kahin organized) both a June 1994 workshop on information infrastructure standards issues and a July 1994 workshop (plus a July 1995 follow-up workshop) intended to motivate more economics research associated with Intemet and broader information infrastructure economics. A March 1995 workshop organized by Lee McKnight and the MIT Research Program on Communication Policy13engaged more technologists than the TPWG sessions, generating more discussion of how Internet technology works and is evolving. Also in 1995, the Organization for Economic Cooperation and Development began to plan a series of international cross-disciplinary meetings to address the economics of the information economy, including Internet-related issues. At the US National Research Council, the Computer Science and Telecommunications Board (CSTB) has explored the nature, directions and economic implications of the Internet and other networks through a series of projects leading to several reports, most notably the 1994 Realizing the Information Future: The Internet and Beyond.TM That report's comprehensive technical assessment of open and integrated information infrastructure, embodying fundamental features found in the Internet, provides a point of departure for assessing several associated public policy, including pricing, issues,is The CSTB efforts involve sustained interaction among heterogeneous panels of experts, augmented by rigorous peer review. That process of sustained interaction motivated the author to attempt a similar process on a smaller scale and with more emphasis on economic issues, resulting in the 1995 TPRC panel.
7For example, national and multinational companies routinely used networks to exchange information among dispersed units for such purposes as tracking and analyzing sales performance, rationalizing purchasing, facilitating payroll and other internal accounting, supporting sales forces in a variety of field contexts, enhancing order processing and customer service, and so on. Electronic data interchange (EDI) and other so-called interenterprise communication applications encouraged companies to communicate with external parties and to adjust their approaches to internal data, information, and communications to accord with external information sharing requirements. 8Since 1972, the TPRC series has served as a forum for discussion of economic and legal policy issues in telecommunications, including domestic and international perspectives and reviews of recent and ongoing research. In 1995, the broader TPRC program featured presentations on conventional network economics, including contrasts and interconnections between cable and telephony environments. ~'l'he Internet, of course, was the principal medium of communication for establishing the panel, considering alternative participants and themes, posing issues for consideration, assuring sufficient differentiation and complementarity, exchanging evolving outlines and drafts and comments on same, and attending to administrative aspects of panelist and paper preparation. This network-mediated collaboration continued on page 164
associated with electronic networking and various combinations of telephone and computer systems (eg 800-number telephone services supported by sophisticated product and customer databases, specialized on-line bibliographic database services, and national or multinational private corporate data and voice networks). 7 The Internet broadened the actual and potential networking constituency and demonstrated new possibilities for open and interorganizational communication (as opposed to closed private networks or integrated sets of services offered by a single provider). 'Electronic commerce' became a new buzzword in the mid-1990s, underscoring the growing value attached to Internetstyle networking as a business or business tool. These and related trends made understanding the economics of the Internet a more practical and urgent concern. The autumn 1995 TPRC was ideally timed to further the analysis, s The TPRC Internet economics panel was distinguished by the active cross-disciplinary interaction that shaped the individual papers, discussant presentations and panel discussions. 9 Each of the papers involved inputs from both network technologists and economists; three (MacKieMason et al, Lehr and Weiss, and Shenker et al) were developed by technologist-economist teams, one by a technologist with some review input informed by economics (Clark), and all were exchanged among the panelists (paper authors and discussants) for preliminary reactions. The papers were complemented by informal presentations by two discussants: Craig Partridge, a computer scientist with Bolt Beranek and Newman, who collected and analyzed data on the apparent business strategies and financial performance of Internet service providers, and Padmanabhan Srinagesh, an economist with Bell Communications Research, both presented highlights from relevant technical work at Bellcore and commented on the key economics issues. 163
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What is special about the Internet continued from page 163. resulted in a set of papers and discussant The central technological issue in Internet economics is network presentations that was more complete than those typical of many of the earlier architecture. By design, the Internet is very different from the teleworkshops that considered similar issues phone network. As Clark and Shenker et al explain, it uses its (see Table 1). l°Kahin published a discussion paper at underlying physical facilities very differently (for example, there is no Harvard in 1989 entitled 'The NREN as a equivalent to a 'telephone call') and, historically, more efficiently quasi-public network' and organized a through statistical multiplexing of traffic from multiple users via packetworkshop on commercialization of the Internet in March 1990, which led to the switching. These characteristics affect the cost of Internet service. Internet RFC 1192. Another characteristic, which also relates to cost, is the nature of the 11Vadan, MacKie-Mason, and Economides , service, Unlike circuit-switched telephony, which commits a fixed established World Wide Web sites during 1994-1995 that feature articles, biblio- allocation of capacity to each user for the duration of a call, the graphies, and other information relating to Internet's 'best effort' service allows for automatic adjustment of the Internet economics. Varian's site at the quality of service in response to traffic load or other conditions, which University of Berkeley (www.sims.berkeley. means, for example, that transmission of a data file of a given size may edu), like the one established with MacKieMason at the University of Michigan take longer under some circumstances than under others. Congestion or (www.spp.umich.edu), reflects his current excessive load relative to capacity has been the principal factor in broad mission to foster the study of the 'information economy'; Economides' transmission delay; the Internet architecture yields negligible marginal ([email protected]; edgar.stern. cost in the absence of congestion, leading to exploration of technical and nyu.edu/networks/biblio.html) has included pricing mechanisms to discourage 'excess' use that might lead to an 'interactive bibliography' on the economics of networks for which he has solicited congestion. entries. Alok Gupta and his colleagues at Clark's proposal for pricing based on expected capacity combines the University of Texas at Austin Center for systematic incorporation of expectations for average bandwidth and Information Systems Management have a Web site (www.cism.bus.utexas.edu) on traffic burstiness with agreements between network service providers the economics of the Intemet and electro- and customers or interconnected providers for prioritization of traffic. nic commerce. Like previous proposals to implement a priority-based pricing scheme, ~2See, for example, Farrell, J and Shapiro, C 'Standard-Setting in High-definition it reduces the randomness of the incidence of congestion. 16 As Clark Television' in Baily, M N and Winston, C and Shenker et al make clear, however, Internet pricing schemes will (eds) Brookings Papers on Economic take effect in a system contextPthe Internet--that is highly automated. Activity: Microeconomics Brookings InThe Internet is designed and implemented in ways that incorporate stitution, Washington, D.C. (1992). Farrell, who has also addressed the economics of assumptions about user behavior, limiting expectations for or accomintellectual property protection and the in- modation of direct, ad h o c or atypical expressions of user preferences. tersection of standards-setting and intellectual property protection, became the Of course, better understanding of demand and good engineering Chief Economist at the US Federal Com- together may lead to mechanisms that avoid these limits as much as munications Commission in early 1996. possible. 13McKnight, L W and Bailey, J P (eds) Neither Internet architecture nor Internet traffic patterns/demand is 'lnternet economics' Journal of Electronic fixed. On the traffic/demand side, enhanced capabilities for using the Publishing 1996, in press. ~4Realizing has generated consider- Internet for voice and video traffic imply requirements for more able discussion in the community of Internet technologists and in US information predictable quality of service than that of best effort; support for infrastructure policy circles. It is comple- alternative qualities of service is being developed through evolution of mented by The Changing Nature of the Internet protocols. On the architecture side, support for more Telecommunications/Information Infrastructure (1995), Keeping the US Computer collection of accounting information, necessary to support billing reand Communications Industry Competi- lated more directly to actual use, is under consideration. Within the tive: Convergence of Computing, Com- Internet Engineering Task Force (IETF), interest in issues relating to munications, and Entertainment (1995), and The Unpredictable Certainty: Informa- pricing has been increasing, and there is a working group considering tion Infrastructure Through 2000 (1996). issues in accounting. Also emerging is support for greater protection of All are published by the National Academy privacy, security, and intellectual property rights---protections that may Press, Washington, DC 15See Blumenthal, M S 'Realizing the in- increase demand for Internet service and that, in combination with pricing, may be a basis for competitive differentiation. formation future: technology, economics, and the open data network' in Brock, G W Multicast service, which can use the Internet more efficiently by (ed) Toward a Competitive Telecomallowing one transmission into the net to be replicated inside the net as munication Industry: Selected Papers from the 1994 Telecommunications Policy Re- appropriate to reach a number of recipients, is evolving. Shenker et al search Conference, Gerald W. Brock, edi- note that pricing can encourage the use of multicast where it may be tor, 275-287 Lawrence Erlbaum Associmore efficient, but that current multicast routing technology may need ates, Mahwah, NJ (1995) continued on page 165 to be complemented by additional accounting mechanisms to support 164
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billing. Multicast elevates concerns about flexibility in charging: does the technology provide support for charging receivers as well as senders, and in what way? Similarly, fast-growing traffic on the World Wide Web overlay to the Internet has led some technologists to advocate distributing and storing popular information resources in multiple sites to conserve bandwidth and reduce congestion risks, another prospect for which pricing can provide incentives.
Internet economics
continued from page 164 16Hal Varian notes in a personal communication that through several electronic mail discussions, he and David Clark appear to have converged on this thinking.
The economic issue that has received the most attention to date is pricing; under that category, the dominant topic has been pricing to minimize network congestion. This issue is addressed by Clark, Shenker et al, and Lehr and Weiss. Discussions among economists and technologists including conditions such as congestion that inform desirable pricing regimes---and associated technical mechanisms--can help to achieve a more sophisticated pricing debate within the Internetdeveloping and -using communities. To this point, debate can be caricatured as a choice between access-based (subscription) and usagebased charges, with large-scale users fearful of large usage-based bills. Shenker et al call for estimating expected congestion as a basis for local charging at the access point (taking account of the destination) in a scheme they call 'edge pricing'; Clark calls for estimating network capacity, noting that such estimates are not guarantees but might be useful for user decision-making. Symptomatic of the challenges of cross-disciplinary analysis, it should be noted that the treatment of key assumptions varies with the backgrounds of the authors. Reflecting computer science/engineering perspectives, Clark and Shenker et al argue for using expected-value estimates as pragmatic tools for decision making under uncertainty, while MacKie-Mason et al and Lehr and Weiss, drawing more from the traditions of economics, present certain assumptions as potentially over-simplifying parameters. Lehr and Weiss, for example, assume a competitive market and point to the challenge of adapting their analysis to account for market power among Internet service providers (ISPs). According to data on actual industry trends presented by Partridge as a discussant, such market power is a real prospect. Industrial organization--including the traditional dimensions of industry structure, conduct a , d performance--is another fundamental concern of the economics of the Internet. Because of its open and layered architecture, the Internet has an evolving and uncertain role as a common foundation for internetworking among a variety of network service providers and private networks. As such, it affects traditional telecommunications providers who may supply facilities or access services or may face competition from others who do. It is also driving the growth of new kinds of businesses that provide higher-level services (eg access to specialized information repositories, multi-player games) or ancillary middle-level services (eg information resource directories, additional protections of privacy and security) that build on basic telecommunications services. This business layering raises questions about economies of scale and scope, vertical and horizontal integration and competition, the sustainability of the lower-level businesses based primarily on capital-intensive, physical communications facilities, and the economics and business aspects of interconnecting both facilities and services. The 165
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questions are so numerous and the context so dynamic that the amount of speculation greatly outweighs the amount of analysis to date. Lehr and Weiss highlight the issue of internetwork settlements, noting the existence of information asymmetries and the opportunities for strategic manipulation of prices. Issues relating to network interconnection are also touched on by Clark and Shenker et al. MacKie-Mason et al posit a distinction between architectures that are 'aware' of the kind of traffic they support and others that are 'blind'. They relate architecture to incentives for market entry and diversity in networkdelivered content. Their analysis raises questions about how costs relating to content arise and how both architecture and pricing combine to influence exPerimentation, or even an excess of content ('clutter'), that may be. made available via networks. Their discussion of the relationship among supply of content, supply of more basic network services, and network architecture underscores the difference between an information infrastructure and the simpler concept of telecommunications infrastructure. It points to the need for joint examination of network economics and the economics of content supply in networked environments (including pricing, incentives and quality aspects, and incorporating comparisons or contrasts between television and other conventional entertainment programming and software-based service programming such as database access, message-exchange, and games and other multi-user interaction activities). Industrial organization concerns lie at the heart of questions raised by Srinagesh about asset-stranding and the sustainability of facilitiesdominated telecommunications businesses in his 1994 TPRC paper, 17 as well as in the context of the 1995 panel. He expanded on this theme in a paper prepared for the CSTB NII 2000 project. Noting different categories of ISPs, themselves displaying different degrees of layering depending on whether they own their own facilities, Srinagesh and co-author Gong observe that 'the layered structure of data communications services leads to a recursive relationship in which the cost structure of services provided in any layer is determined by prices charged by providers one layer below.' They ask: 'Can ISPs with varying degrees of integration coexist in an industry equilibrium, or are there definite cost advantages that will lead to only one kind of firm surviving in equilibrium? 'is During the TPRC panel discussion, data presented by Partridge on the range of ISPs show that today, and for at least the short term, variation is significant. Finally, it is worth noting, as the data presented by Partridge as a discussant attest, that many of the costs actually incurred in the provision of Internet service are not related to bandwidth. Publicly available mid-1995 data from several ISPs suggest that bandwidth accounts for about 30-35% of their costs, a share that is declining; such 17Srinagesh, P 'lnternet cost structures costs are incurred early by ISPs in their efforts to build points of and interconnectionagreements' in Brock, G W (ed) Toward a Competitive Telecom- presence and gain market position. Rather, Partridge suggests (consismunication Industry: Selected Papers from tent with Srinagesh's observations at the 1994 TPRC) that dominant the 1994 Telecommunications Policy Research Conference 251-273 Lawrence costs reflect marketing, customer support, and other complements to Erlbaum Associates, Mahwah, NJ (1995) the actual delivery of service over the Internet. These data are com18Gong, J and Srinagesh, P 'The econoplemented by anecdotal reports on market experiments by cable and mics of layered networks' white paper pretelephony service providers, which underscore how dynamic and uncerpared for Computer Science and Telecommunications Board. (1996); The Unpredict- tain the market is and how aggressive service providers must be to gain able Certainty: Information Infrastructure customers. Together, these data are but one of many factors that bind Through 2000 National Academy Press, the relationship between price and cost in the Internet arena. Washington, DC (1996)
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Next steps: directions for future research As the above overview is intended to illustrate, Internet mechanisms are evolving to help match services to demand, while pricing is attracting growing interest as a vehicle for influencing both demand and design of available mechanisms. What don't we already know that we need to understand about viable pricing regimes? How much more do economists and the larger community engaged in the study or implementation of regulation need to know about the way the Internet works? Several issues come to mind as a result of discussions at the 1995 TPRC and through the author's relevant work at CSTB. These include: • How can the analysis of network and content economics be jointly advanced? How can these analyses be better integrated with assessment of applications of information infrastructure in specific contexts, such as electronic publishing and electronic commerce? • How can both theoretical (eg welfare and optimality analysis, assessment of regulatory concepts) and empirical (eg industrial organization trends, market experimentation experiences) analyses best advance? • How can technological, business/strategic and economic assessments of the layered information infrastructure be best integrated? Perspectives from network economics, industrial organization and game theory, and network architecture and other subdisciplines of computer science should continue to be brought together to assure sufficient realism and comprehensiveness. • What is the basis for deciding which among alternative accounting mechanisms is preferable? That is, how can economists advise those who are advancing Internet technology--given uncertainty and experimentation in the market? Finally, it is the author's observation that better demand modeling and analysis is essential for understanding the welfare consequences of pricing and predicting results from alternative strategies. What is it that users value, how much, and how much do their valuations vary? Given user behavior, what does growing use of a highly automated system such as the Internet imply for market performance as well as structure? As illustrated by the 1995 TPRC Internet economics panel, both technologists and economists make assumptions about what people who use the Internet want, how those preferences may affect willingness to pay, and the incentive effects of alternative pricing schemes. The design of technical mechanisms is predicated on assumptions about what users want to do, which in turn reflects both technical capabilities and pricing incentives; altering technical mechanisms is time-consuming and expensive, inasmuch as it requires design and implementation agreements among a growing number of diverse parties. The basis for today's assumptions is limited; systematic collection and analysis of crosssectional and longitudinal data could go far in helping to illuminate Internet markets, gauge future developments and inform associated policy options.
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