The Economics of Electronic Commerce

Research in the economics of the Internet is a subfield of communications economics. Communications economics deals with economic problems associated with limited resources, such as the telephone network, on which Internet traffic happens to travel. Although the Internet is based on different technologies, such as routing and packet switching, it is essentially an alternative use of the existing telephone network. Accordingly, Internet service pricing, taxation, and competition among service providers are important topics of research in determining efficient resource allocation, the profitability of investments in telecommunications, and proper government policies.

However, the very nature of Internet communications is changing. The next generation of Internet traffic may well bypass traditional telephone or cable networks and connect users via satellites that transmit data directly into personal computers. Such wireless communications are already beginning to dominate many business sectors, such as paging services, mobile telephones, and cable television. With low earth-orbiting satellite networks and infrared sensors in computers, the infrastructure for the future Internet may bypass the wired telephone infrastructure. After all these wired and wireless networks are converted into digital networks and become interoperable, today's wire-based Internet will be only a small portion of the information infrastructure.

Regardless, the nascent interest among economists is focused on the wired Internet infrastructure. In contrast, the economics of electronic commerce is concerned with a new market whose delivery and communication infrastructure happens to be the Internet. The distinction should be clearly made between digital product markets and digital delivery infrastructure. To use an analogy, the economics of the Internet focuses on the workings of the interstate highway system, and the telephone and mail networks, whereas the economics of electronic commerce focuses on markets whose transactions are facilitated by communications networks and delivery systems.

The primary focus of the latter is on product choices, market strategies, prices, and other traditional subjects of economics within the context of digital products and, equally important, physical products whose production, marketing, and consumption processes are affected. Although transportation and communications economics is an important field, the economics of the Internet, as currently defined and researched, is only one small part of the economics of electronic commerce. The confusion stems from the practice of regarding the Internet and electronic commerce as equivalent.

The Internet, due to its openness and versatility, is the medium of choice for electronic commerce. However, any digital communications media will soon be capable of supporting virtual transactions in the electronic marketplace, including telephone wires, cables, microwaves, and satellites. Occasionally, commerce on the Internet is regarded as equivalent to electronic commerce. But the distinguishing characteristic of electronic commerce is in the way the market is organized and transactions are carried out: by virtual market agents, digital products, and electronic market processes. The economics of electronic commerce aims to analyze fundamental changes in market processes and products. Such an innovative market can exist and function regardless of the infrastructure on which it is based. The Internet, in essence, is only a transitory infrastructure on which the electronic marketplace has been launched.