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«A review and critique of its applicability to ICT Alain Bourdeau de Fontenay (CITI) Jonathan Liebenau (LSE & CITI) The problem Perceived widening ...»

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A review and critique of its

applicability to ICT

Alain Bourdeau de Fontenay (CITI)

Jonathan Liebenau (LSE & CITI)

The problem

Perceived widening gap between mainstream

economics & critical issues

Reluctance of neoclassicists to accommodate

new methods

Newly articulated problems that are solvable

with alternative approaches



Introduce heterodox approaches & illustrate

potential roles in ICT economics

Show intellectual heritage, inter-linkages Argue for their utility to address both longstanding and new problems High switching cost But … not as high as people might think We will show what that cost is: what needs to be abandoned, what loss it represents, and what it costs to acquire the new approaches 2 Chronology “Classical” Smith “Neoclassical” Marshall Knight, Sraffa & Young of which “mainstream economics” Friedman, Becker Stigler, Alchian Post-neoclassical (or “heterodox”) economics Evolutionary economics (e.g., Nelson and Winter) New institutional economics (Williamson, Hart, Coase, North) Behavioral economics ( Kahneman, Thaler, Frank, Ariely) Experimental economics (Vernon Smith, Ostrom, Ariely) Economic sociology (White, Fliegstein, Granovetter, Swedberg) Neuroeconomics (Camerer, Zak) Economic history (Chandler, Scranton) Complexity theory (Cherry and Bauer) Real options (Noam and Alleman) 3 Marshall & moves from classical to neoclassical Place, aggregation & industry structure Making economics a “science” Fascination with mathematical economics Discreet and abstracted analysis Friedman: “truly important and significant hypotheses will be found to have ‘assumptions’ that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions” (1953) Knight as pivotal figure Market clearing Uncertainty Theory of the firm Prices, information and competition Knight can be a bridge figure; lowering switching costs 4 Knight’s uncertainty With uncertainty entirely absent, every individual being in possession of perfect knowledge of the situation, there would be no occasion for anything of the nature of responsible management or control of productive activity. Even marketing transactions in any realistic sense would not be found. The flow of raw materials and productive services to the consumer would be entirely automatic. (1921) Knight’s uncertainty Methodological individualism: focus on individual’s decision, not average or representative Human judgment as unit of analysis-- idiosyncratic, not typical situations

Link to market clearing:

Requires learning; historical time Costly to communicate; must be translated into a probability-based market process (e.g. insurance) Cannot be assumed to reach neoclassical market clearing equilibrium (except in the long-run)

–  –  –

Post-neoclassical approaches, e.g., Evolutionary economics New institutional economics (NIE) Behavioral, experimental economics, neuroeconomics Complexity theory Real options Incorporates Mandelbrot/Taleb “highly improbable” Core neoclassical doctrine Rationality Self-interest Optimization Abstraction from context Externalities (and technology-focus) Allocation as a static problem

–  –  –

“Our” problems Networks Dynamic analysis of culture & institutions Technology as endogenous Markets & exchanges Residual rights, vertical integration & competition “New” theories of the firm Agency, moral hazard and other transaction problems; governance Hold-up and access problems

–  –  –

New institutional economics (Coase): spectrum auctions Beh. & exp. econ. (Banks): spectrum auctions

Behavioral economics (Kahneman & Tversky):

some discrete choice demand analyses Behavioral & inst. economics (Noam): open spectrum access Applications 1 Real options (Alleman and Noam) and the incumbent’s costs New institutional economics (transaction costs) and regulated interconnection benchmark contracts Evolutionary economics (e.g. Henderson and Clark;

Christensen and Bower; Bourdeau de Fontenay and Bourdeau de Fontenay) and peer-to-peer and file sharing Institutional economics (e.g. Noam) and complexity theory (Cherry) and common carriage; network neutrality 9 Applications 2 Economic sociology (White): interconnection, peering, ICT competition Behavioral economics (Shiller) & Econ. of the highly improbable (Mandelbrot and Hudson; Taleb): investment;

the dot com bubble Innovation economics/evolutionary econ. (Bourdeau de Fontenay & Liebenau; ITIF) regulation & judicial treatment of ICT competition New institutional economics – residual rights (Bourdeau de Fontenay): peer-to-peer Applicability of alternatives P-2-P Infrastructure & exchange Regulation & market shaping Networks, scale & scope 10 Case 1 p-2-p Institutional issues: who is harmed by file exchange, and exactly how/how much?

What alternative business models could work Inability to transform is common: changing ingrained behaviors & beliefs deserves lessons from evolutionary & institutional economics “new” economic questions for p-2-p What is endogenous?



Delivery mechanisms?

Pricing policies?

Where to take ceteris paribus Musicians’ income?

Producers’ &/or distributors’ income?

Which institutions constitute the core?

What should the economics of innovation be?

11 Case 2 infrastructure & exchange What constitutes “the infrastructure”?

Backbone? Last mile? Facilities only?

What constitutes “the market”?

Trades in access & services Consumers & their behaviors Critical nodes, the control of knowledge & “too big to fail” Infrastructure as resource The value of sunk costs The status of hidden value (e.g. rights-of-way)


Coase’s lighthouse as infrastructure Applied to municipal WiFi; digital divide argument Identifying need for infrastructure not unambiguous Various solutions to public facility provision Geography of local needs/overall transaction costs Which social goals merit infrastructure finance?

12 Case 3 regulation & market shaping Intermediate & two-sided markets Institutions and behaviors shape the scope of an industry--old sectoral notions frequently transform Confusions exogenous vs. endogenous Transitions (e.g. monopoly to “competition”) Gaming systems and exercising options Case 4 networks, scale & scope

–  –  –

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