Appendix 2: A Brief Economics of the Internet


Without transmission, there would be very little public interest in the idea of E-cash, or indeed in encryption. The rise of the Internet as a low-cost, publicly available medium, has, amongst many other things, provided the perfect environment for the exchange of E-cash, as well as making the usage of encryption a current issue. Hence it is important to get a feel for how the Internet has managed to provide a fertile gound for these new technologies, where other apparently similar networks have not.

This appendix describes some of the ramifications of the Internet, as viewed from the discipline of economics.

Network Externalities

Like the telephone, the usefulness of the Internet increases according to the number of people who use it, an idea known to economists as network externalities. Its ability to link diverse communities such as researchers and revolutionaries across the world is unparalleled. Various estimates give about 30 to 50 million users with growth at something like 10% per month.

Lowered Costs

A second, decidedly economic attribute of the Internet is its ability to lower transaction costs and searching costs. Transaction cost reductions relate to the cost structure of the network, where the fixed cost of connecting to a local node is the only serious burden. Once that fixed cost is absorbed as sunk costs, the traffic and activities are essentially free (or at least, trivial in comparison with alternative systems). Searching cost reductions derive as a side effect to the low cost publishing benefit that derives from the World Wide Web. As individuals have now found it in their power to publish material to an audience of millions, the need to search this content has resulted in the development of relatively effective technologies, known as search engines, for directing information searches. See, for example, AltaVista.

These particular costs are also the basis of barriers to entry in a class of industry known as intermediation. Consequently, traditional incumbents of this class of business are under threat as fleet-footed innovators who develop new systems on the Internet that take advantage of the lowered costs. Disintermediation, as the process is known, is a possibility wherever there is a large, entrenched industry based on finding information or securing economies of scale in transmission of information.

Regulatory and Historical Freedom

Thirdly, the Internet is a community of cooperating nodes, rather than an entity organised on a statal or hierarchal basis. This has resulted in a unique character: On one hand, there are tightly defined technical interactions with an emphasis on connectivity, whilst, on the other, there is only loosely applied control over the usage made of the net. Consequently, it has spread across state borders without any regard for local cultural or regulatory concerns, and the efforts of many authorities to enforce their particular agenda have not been as successful as these authorities have been accustomed to expect. This freedom from regulatory interference results in the possibility of an innovator completely avoiding the defensive manouvers of incumbents and advancing without the carrying cost of historical baggage.

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