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About this book

Gary Madden was a renaissance man with respect to the nexus between information and communications technology (ICT) and economics. He contributed to a variety of fields in ICT: applied econometrics, forecasting, internet governance and policy. This series of essays, two of which were co-authored by Professor Madden prior to his untimely death, cover the range of his research interests. While the essays focus on a number of ICT issues, they are on the frontier of research in the sector. Gerard Faulhaber provides a broad overview of how we have reached the digital age and its implications. The applied econometric section brings the latest research in the area, for example Lester Taylor illustrates how own-price, cross-price and income elasticities can be calculated from survey data and translated into real income effects. The forecasting section ranges from forecasting online political participation to broadband’s impact on economic growth. The final section covers aspects of governance and regulation of the ICT sector.

Table of Contents

Frontmatter

Chapter 1. Civilizations’ Economic Drivers: Babylon to Bitstream

Abstract
Economic drivers, or scarce resources, determine the social, political, and economic structure of civilizations and when they change, the civilization changes and its entire power structure changes. These changes are wrenching and give rise to extreme social tensions and often violence. The economy is now in the middle of such a transformation, to an information economy: cyber-civilization. We can learn lessons from the past changes, as social, political, and economic strains are now emerging. Suggestions for coping with these stresses focus, inter alia, on educating the workforce for a new economy. Today’s policymakers need to address these issues.
Gerald R. Faulhaber

Applied Econometrics

Frontmatter

Chapter 2. A Different Approach to Deriving Price and Income Elasticities: Applications to Telecommunications and Gasoline & Motor Oil

Abstract
The primary purpose of this chapter is to demonstrate how a framework developed from data embodied in surveys of households’ consumer expenditures can be used to calculate complete arrays of own- and cross-price elasticities. The procedure is illustrated for simulated changes of ±10% in the price of telecommunications and for ±50% and −50%/+75% changes in the price of gasoline & motor oil. The engine for the analysis is a matrix of “intra-budget” coefficients that represent the direct relationships amongst the different categories of expenditure in households’ budgets. A strength of the framework is that price changes can be translated immediately into real-income effects, which in turn allows for straightforward separation of income and substitution effects.
Lester D. Taylor

Chapter 3. A Cross-Country Analysis of ICT Diffusion, Economic Growth, and Global Competitiveness

Abstract
This study explores the causal relationships between information and communications technology (ICT) and economic growth. It spans the post-Great Recession period of 2008–2017, which is both a period of economic tumult and slow recovery but also significant pathbreaking developments in ICT technologies. Generalized Method of Moments estimation is applied to a dynamic panel of 107 countries to examine causality between ICT measures and economic growth. The study is unique in that it distinguishes between more affluent and less affluent countries, which makes a significant difference in the results. Stronger and statistically significant causal impacts exist in less affluent countries from mobile internet penetration to GDP per capita. Conversely, causal impacts are statistically detected from GDP per capita growth to mobile internet penetration in both more affluent and less affluent countries. However, a weak and delayed causal impact occurs from GDP per capita to fixed broadband penetration in more affluent countries; none in less affluent countries. Granger-causality between mobile internet penetration and GDP per capita is, indeed, bidirectional, at least in less affluent countries.
Aniruddha Banerjee, Paul N. Rappoport, James Alleman

Chapter 4. Adoption of E-Commerce by Individuals and Digital-Divide

Abstract
E-commerce penetration rates are distant among those groups of individuals with the lowest and the highest levels of online shopping adoption. This is an indicator of digital-divide, having negative effects in terms of untapped opportunities for people, companies, and the whole economy. Key socioeconomic and demographic determinants of adoption of e-commerce are explored, analyzing a dataset of 174,776 observations for the period 2008–2017 in Spain. The empirical analysis is based on a standard neoclassical utility maximization framework. Linear probability model, logistic regression, and Heckman’s sample selection correction model have been used. The results suggest that e-commerce adoption is positively related with being male, having higher levels of education, income and digital skills, being Spanish, and being employed; while being female, older, and belonging to a household of two or more members have negative effects. An interaction between digital skills and age has been introduced in the model, where high digital skills seem to have a positive influence, partly counteracting the lower odds for some age groups. Policy recommendations related to demand and supply measures are suggested to foster the adoption of e-commerce.
Ángel Valarezo, Rafael López, Teodosio Pérez Amaral

Forecasting

Frontmatter

Chapter 5. Predictive Accuracy Tests for Prediction of Economic Growth Based on Broadband Infrastructure

Abstract
This chapter investigates whether predictions of future economic growth can be improved by using standard measures of broadband infrastructure. The investigation is carried out by comparing the predictive accuracy of dynamic panel models of economic growth estimated with and without measures of broadband infrastructure. The more powerful versions of the Diebold–Mariano–West (DMW) and Morgan–Granger–Newbold (MGN) test are employed for predictive accuracy comparison. It is evident that measures of broadband infrastructure can improve predictions of GDP growth after controlling for standard growth determinants.
Walter Mayer, Gary Madden, Xin Dang

Chapter 6. Modelling Internet Diffusion Across Tourism Sectors

Abstract
This study investigates the Bass Diffusion model. Bass’ parameters of innovation (p) and imitation (q) help explain adoption, and the ratio of these parameters sheds insights on critical mass. This study compares the parameters p and q across 13 internet diffusion datasets in five tourism sectors across international, European and five national datasets. Information and communication technologies (ICTs) play an increasing role with tourists and tourism organisations. The data contain destination management organisations (Switzerland, Austria and Germany), tour operators (European and Swiss), accommodation providers (international chain hotels, Malaysian hotels, Swiss affiliated hotels and Swiss guest houses) and Swiss cable cars. This study also uses the Gamma/Shifted Gompertz model to incorporate heterogeneous adoption. Across the same datasets, tourism organisations showed heterogeneous adoption tendencies and the influence of critical mass. This exploratory research illustrates the usefulness of Bass’ parameters both as a foundation and to measure critical mass.
Miriam Scaglione, Jamie Murphy

Chapter 7. Exploring Drivers of Online Political Participation in the European Union

Abstract
Using a sample of internet users across the European Union, this chapter investigates the drivers of citizens’ online political activities from an integrated resources approach which accounts for the effects of both traditional political participation-related resources and three types of online-specific resources. The present analysis shows that digital skills and online networks positively impact participation in three online political activities, namely, sending emails to political representatives, joining online consultations, and reading policy documents online. Socioeconomic resources are also important for online political participation, indicating that the internet does not alleviate inequalities traditionally observed in offline political activities. Moreover, citizens appear to utilize official channels for political participation at a much slower pace than the efforts made by public institutions to engage them.
María Rosalía Vicente, Hiroaki Suenaga

Chapter 8. Machine Learning and Forecasting: A Review

Abstract
The proliferation of business data and on-demand computing have propelled the use of artificial intelligence methods in quantitative forecasting. Machine learning has a prominent role in solving clustering and classification problems as well as dimensionality reduction. Nevertheless, traditional statistical methods of forecasting continue to perform well in competitions and many practical applications. The chapter considers critically the successes of machine learning in forecasting, using some case studies as well as theoretical considerations, including limitations on machine learning and other techniques for forecasting. It also discusses weaknesses of the Vapnik–Chervonenkis theory. The main aim of the chapter is to stimulate scholarly dialogue on the role of machine learning in forecasting.
Petrus H. Potgieter

Chapter 9. Stated Consumer Behavior with D-Efficient Choice Set Designs: The Case of Mobile Service Bundles

Abstract
A key aspect in the design of stated preference (SP) surveys is the determination of the matrix of attributes. Traditionally, practitioners have used orthogonal and similar methods to optimize these design matrices in linear and nonlinear settings. Recent research, however, has raised several concerns as to whether these methods produce optimal forecasts for nonlinear models. Because of these concerns, a different method known as efficient or optimal design was developed. This study applies D-efficient design to a nonlinear model and develops a test to measure if, and under what circumstances, D-optimization promises more accurate forecasts than traditional methods.
Christian M. Dippon, Gary Madden

Governance of the Internet

Frontmatter

Chapter 10. Platforms with Restrictive Licensing

Abstract
Two-sided platforms coordinate two types of users in order to increase the value of the whole system surrounding the platform. Users of a platform have different outside opportunities, and these influence their behavior on the platform. Platforms often limit these outside projects through restrictive licensing agreements. These are often thought to reflect market power and a foreclosure motivation, but it shows that they can be a way of managing the “quality commons” aspect of a platform. This chapter analyzes a platform where all component developers produce two kinds of quality—inside quality for their offerings on the platform and outside quality on their outside project. It shows that there are cases where restrictive licensing agreements that shut down the outside projects can increase social welfare, while in other cases they reduce social welfare. The reason is that if consumers and the platform value components inside quality enough, all agents prefer to be protected from low-quality behavior, even at the cost of giving up outside projects.
Christiaan Hogendorn

Chapter 11. QoS Investment, Vertical Integration and Regulation of the Internet

Abstract
This chapter provides a simple theoretical framework to analyze optimal provision of quality-of-service of the internet by a monopolistic internet service provider (ISP) in the presence of vertical integration. There are two vertically differentiated content providers (CPs), and one of them is integrated with the ISP. The competing CP can access to the internet at free of charge. If left unregulated, the profit-maximizing ISP could provide positive levels of quality to both CPs due to perfect complementarity of internet and content. Especially, if quality provided by the affiliated content is sufficiently low, the integrated ISP offers relatively higher quality of internet service to the competing CP. In addition, this chapter identifies a market configuration in which non-discriminatory quality regulation might be welfare improving.
Edmond Baranes, Cuong Hung Vuong

Chapter 12. Operations of Internet Platform Intermediaries

Abstract
This chapter identifies defects in the ways most governments currently respond to allegations of harm to consumers and competition from internet giants such as Google, Facebook, Amazon, etc. Governments can refrain from regulating access and tolerate market concentration as the proper reward for ventures offering desirable content and carriage services. Alternatively, they can impose ex ante safeguards to remedy anticipated harms to competition and consumers such as market concentration, price discrimination, reduced consumer welfare and captured consumer surpluses. Between these poles, governments can rely on courts or an expert regulatory agency to evaluate complaints and offer calibrated ex post remedies. The chapter analyzes a recent Supreme Court case that endorses an analysis of both downstream and upstream market impacts. It recommends that courts and government agencies should address marketplace distortions by recalibrating existing tools to examine the competitive and consumer impacts on both sides of an intermediary’s platform.
Rob Frieden

Chapter 13. Escalating Instability of Network Neutrality Policy in the U.S.

Abstract
In the U.S., network neutrality policy has been on a trajectory of escalating political instability since the early 2000s. The analysis here explains how this trajectory can be understood as a microcosm of the more general trajectory of political dysfunction under U.S. governance that coincides with the era of deregulatory policymaking. Under the U.S. constitutional structure of federalism and the distinctive role of the judiciary under a common law system, adversarial legalism—that is, lawyer-dominated litigation—has evolved as a means of policymaking in the U.S. The federal Telecommunications Act of 1996 was enacted during the waning period of bipartisanship negotiation, but its implementation has been left to a heightened period of adversarial legalism under hyperpartisanship between the Republican and Democratic political parties. As a result, the instability of U.S. network neutrality policy is reflective of the current phase of hyperpartisanship within a process of adversarial legalism. Until the underlying political dynamics change, the policy instability will likely continue.
Barbara A. Cherry

Chapter 14. Multisided Markets and Platform Dominance

Abstract
Facebook and Google and other internet giants are multisided markets (MSM). The user-side of the market, prices are zero—“free.” On the other side of the market, Facebook’s and Google’s revenues are derived from advertising which appears when the users click on advertisers’ web sites. They can extract exorbitant prices for ads, since they are the only source that can target ads directly to potential customers with laser-like focus to produce enormous monopoly rents. This monopolistic aspect of the internet giants is addressed in the Chapter. Monopoly pricing is not well defined in multisided markets. The paper examines non-transactional multisided markets for their ability to create consumers’ harm. Estimates of Google’s and Facebook’s social cost in terms of consumers’ welfare loss are $54 and $33 billion, respectively, for a total cost of at least 87 billion dollars. The dominant internet platforms can create three major harms to consumers:
  • Increasing prices to consumers via added costs to the products being advertised,
  • Elimination (or non-emergence) of competition in markets to the products being advertised,
  • Increasing prices to consumers beyond the cost of advertising via the market power of the remaining firms in the market of the products being advertised.
James Alleman, Edmond Baranes, Paul N. Rappoport

Backmatter

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