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levin_internet_markets

levin_internet_markets - The Economics of Internet Markets...

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The Economics of Internet Markets ° Jonathan Levin y August 5, 2010 Abstract The internet has facilitated the creation of new markets characterized by improved measurement, increased customization, rapid innovation and more conscious market design. I describe these changes and some of the economic theory that has been use- ful for thinking about online advertising, retail and business-to-business platforms, job matching, °nancial exchanges and other online markets. I also discuss the empirical ev- idence on the operation and e¢ ciency of these markets and some of the open questions for theoretical and empirical research. (JEL Classi°cation: C78, D40, D44, L10, L14, O33) ° This paper was prepared for the Econometric Society 2010 World Congress. I thank Andy Skrzypacz for suggestions, and Marissa Beck for excellent research assistance. The National Science Foundation and the Toulouse Network for Information Technology provided research support. y Department of Economics, Stanford University, Stanford CA 94305-6072. Email: [email protected]
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1 Introduction Technological changes often lead to the creation of new markets. A recent and striking example has been the emergence of internet markets or platforms for search, retail commerce, job matching, social networking, °nancial trading, and other purposes. The growth of these platforms has been dramatic. Amazon opened in 1995 and its sales are currently around twenty-°ve billion dollars a year. China±s Taobao started in 2003 and today has two hundred million active users. Facebook, founded a year later, has over °ve hundred million users. Over the same period, the number of Google searches, and the revenue Google generates from its advertising auctions, has doubled roughly every eighteen months. 1 This growth of internet markets has generated considerable attention from economists, and a great deal of recent research. Some of this work has focused on the market structure of platform industries, and the strategic issues that arise when platforms compete for users. Other strands of research have focused on novel market institutions, such as the keyword auctions run by the major search engines, eBay±s consumer marketplace, and the retail competition created by price comparison sites. In this paper, I try to collect and tie together some of the lessons from these di/erent lines of research, and identify some of the interesting open questions. I begin the paper by describing some of the features of internet markets that I view as particularly salient and distinctive. One reason to start with this is that, after all, there is nothing new about platforms for bringing together buyers and sellers. Shopping malls, trade shows, and newspaper circulars did the same forty years ago. Merchant fairs did so four hundred years ago. Nevertheless, technology does facilitate changes in the way that markets can operate. One such change relates to scale. The internet makes it possible, and often cost-e/ective, to operate markets with millions of participants, and perhaps millions of products, drawn from around the world. Of course, just because this is possible does not
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