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Page 21
2
Illustrative Examples and
Unanswered Questions
This chapter discusses a selection of social science studies
that have provided useful insights for understanding the impacts of
computing and communications and shaping public policy. The aim is
to give a flavor of the results produced by earlier studies and to
introduce some areas viewed as especially promising for future
research, including points raised and issues discussed at the June
1997 workshop and in position papers submitted by the participants.
It is not intended to be comprehensive; the points and issues
discussed illustrate the range and value of social science research
and provide a basis for framing important research questions. The
chapter concludes with an illustrative set of broad topics for
ongoing research drawn from the discussion presented below.
Since the range of potential impacts associated with information
technology is vast, the examples and issues outlined below are
organized according to the domains in which they are
extraordinarily important: private life, including households and
community; social infrastructure; and business, including labor and
organizational process. Cutting across all of these are issues
integral to life in an information economy and society—among
them protection of intellectual property, pricing of information,
and electronic commerce. Another significant impact of computing
and communications is the changing boundaries between these
domains—between people and organizations, organizations and
nations, and the private and public sectors.
2.1 Households And Community
Americans are rushing to furnish their homes with a host of
devices for sending, receiving, and processing huge quantities of
information through diverse
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OCR for page 21
Page 21
2
Illustrative Examples and
Unanswered Questions
This chapter discusses a selection of social science studies
that have provided useful insights for understanding the impacts of
computing and communications and shaping public policy. The aim is
to give a flavor of the results produced by earlier studies and to
introduce some areas viewed as especially promising for future
research, including points raised and issues discussed at the June
1997 workshop and in position papers submitted by the participants.
It is not intended to be comprehensive; the points and issues
discussed illustrate the range and value of social science research
and provide a basis for framing important research questions. The
chapter concludes with an illustrative set of broad topics for
ongoing research drawn from the discussion presented below.
Since the range of potential impacts associated with information
technology is vast, the examples and issues outlined below are
organized according to the domains in which they are
extraordinarily important: private life, including households and
community; social infrastructure; and business, including labor and
organizational process. Cutting across all of these are issues
integral to life in an information economy and society—among
them protection of intellectual property, pricing of information,
and electronic commerce. Another significant impact of computing
and communications is the changing boundaries between these
domains—between people and organizations, organizations and
nations, and the private and public sectors.
2.1 Households And Community
Americans are rushing to furnish their homes with a host of
devices for sending, receiving, and processing huge quantities of
information through diverse
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Page 22
FIGURE 2.1 Penetration of various household
devices in the U.S. market over the 20th century.
SOURCE: Data from Belinfante (1991), Electronic Industries
Association (1984-1990, 1992),
Television Bureau of Advertising (1991), and U.S. Bureau of the
Census (1986, 1990-1992).
media across multitudes of channels. Figure 2.1 shows trends in
acquisition of devices such as personal computers compared with
ownership of two consumer staples—refrigerators and
automobiles. If one could lift the roof from the characteristic
U.S. home, one would see that it looks increasingly like a
multiplex theater. What once took place in the town square, in the
neighborhood tavern, on market day, or in the library can now occur
as easily in the study or in the bedroom. Computers and advanced
communications are also playing increasingly significant roles in
community organizations and in education.
2.1.1 Computer Use in the Home
Computer use in the home is a relatively recent phenomenon, and
one that has changed considerably in the past two decades. At
first, a majority of use was work-related. Today computers are more
accepted as a household technology, with an increasing amount of
software and other development targeted to the home. (For further
discussion and a model for the interaction of the household and
technology, see Venkatesh, 1996.)
Descriptive studies of computer use in the home are relatively
rare and almost always very "thin," that is, based on a small
number of survey questions.
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More intensive and extensive study of computer use in the home
is required to understand what people use the computer for; how
computer use substitutes for other activities; and how it affects
family dynamics, children's educational performance, adults'
employment activities, and so forth. But even the best descriptive
studies inevitably confound household computer use and its effects
with effects stemming from household income and educational status.
Households with greater resources are much more likely to have and
use computers, and they are likely to use them in different ways.
In this situation it is difficult to understand how much of any
described effect is due to the technology and how much is due to
ancillary resources the household brings to bear on such challenges
as understanding how to use software, troubleshoot technical
problems, select software for children, and incorporate computers
into family activities. A good way to untangle the effects of
technology from the effects of other household resources such as
income and education is to conduct field experiments in which
households are given current technology and well-designed training
and support to compensate at least in part for limited income and
educational resources.
The Homenet Project (Kraut et al., 1996; Kiesler et al., 1997),
organized by social scientists at Carnegie Mellon University, is a
field experiment documenting the use and effects of household
computers in more than 100 households in Pittsburgh, Pennsylvania.
Families were selected for demographic diversity, and a matched
sample of eligible but not-selected families was also tracked. Each
selected family was given a computer, modem, extra telephone line,
full Internet accounts for each family member above age 8 who
wanted one, software, training, online support, and access to an
evening telephone help desk. In exchange for receiving technology
and technical support, families agreed to participate in a variety
of data collection efforts, including surveys, home interviews, and
automated logging of software use.
Data collection and analysis are still under way, but the
researchers have already been able to document important
findings:
•
Even with hardware and software designed for ease
of use, personal training, and personal support, people found the
technology hard to understand and use. Significantly, many of those
who stopped (or never started) use blamed themselves rather than
the technology for their problems. Generational effects persist
even when both older and younger generations have the same access
to the same technology. People in the household under the age of 19
use the computer more than people older than 19.
•
Use of electronic mail is better than use of the
Web as a predictor of later e-mail and Web use.
•
Household income and educational levels are not
valid as predictors of Internet use when all the people compared
have adequate technology and support.
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2.1.2 Differential Impacts of
Technology
It is rhetorically convenient to talk as though technology is
used by everyone in the same way and affects everyone similarly,
regardless of their life circumstances. Thus, such generalizations
as "e-mail flattens organizational hierarchies" or "people who
spend time online reduce their face-to-face interaction" are
common.
Historians of earlier technologies such as the telephone have
noted that people use the same technology differently and that it
has different effects, depending on a person's age, gender, income
level, geographic location, and other circumstances (see, e.g.,
Fischer, 1992; Mueller and Schement, 1996).
Numerous researchers have reached the same conclusion about
computers. Attewell and Battle (1997) showed that equivalent
technological capability in homes is associated with higher school
test scores when family income is higher. The Homenet study (Kraut
et al., 1996; Kiesler et al., 1997; described above in section
2.1.1) demonstrates that the same technology in the home is used
differently by males and females, and also by teenagers and adults.
A RAND study of retirees (Bikson et al., 1991) showed that the same
technology is used differently by recent retirees and same-age
counterparts who have continued to work. Section 2.3.4 gives
examples of the differential impact of e-mail use in scientific
communities.
An important related question is understanding why some people
who made use of the Internet at some time then stopped using it.
Demographic studies of the populations of network users and
nonusers are required. The developing population of people who
experimented with Internet use but did not become long-term users
deserves analysis. One study of this topic, using Nielson data from
more than 14,000 households, discovered that Internet "drop-outs"
were less likely than those who continue using the Internet to have
developed social relationships and roles online (Chung, 1998).
Research on differential impacts holds a very important message
to those, such as policy makers and others, wishing to understand
the interactions between technology and society as a single,
uniform impact: they will forever be disappointed or deluded. It is
vital to recognize that the "same" technology has different effects
in different social and organizational circumstances. Indeed, one
of the most important contributions that social science research
can make is in exploring how social and organizational
conditions—such as income, age, sex, or work
status—affect and are affected by how technology is used.
2.1.3 Community
The Internet offers a new locus for communication and
participation. According to a Business Week/Harris poll
released April 28, 1997, of the 89 percent of those surveyed who
used e-mail, nearly one-third considered themselves part
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of an online community. Forty-two percent of those involved in
an online community said that it was related to their profession,
35 percent said that their community was a social group, and 18
percent said that it revolved around a hobby.
The shift away from traditional notions of public space may
threaten older forms of community. Polls show, for example, that
more New Jerseyans know the names of the mayors of New York and
Philadelphia than know the names of the mayors in their own towns.
Although regions vary, this decline in localism seems to be a
characteristic of the U.S. political landscape. Large media
networks collect audiences by concentrating on stories that appeal
to large blocks of viewers and readers. Thus suburban and rural
citizens are quite likely to recognize the name of a city official
for whom they cannot in fact vote. Individuals who commute to
distant workplaces and whose personal networks are spread
geographically are further disconnected. The possibility that
localism may become increasingly irrelevant to increasing numbers
of Americans signals social and political change of a profound
nature. For as long as community has remained intact, for example,
libraries and churches and schools have functioned to bring people
together, to educate newcomers, and to reinforce the virtues of
citizenship.
Today the number of potential secondary anonymous relationships
has increased vastly as individuals seek to accomplish tasks by
relying on mediated information received from strangers.
Home-centered, individualistic, information-heavy approaches to
carrying out their personal and professional lives offer people
opportunities to bypass both the traditional community and the
public sphere.
Hard evidence on the issue of localism and engagement with the
community is very mixed. For example, Americans today change homes
and communities at about half the rate that they did in the
mid-19th century, and even less than they did in the 1950s. It is
possible to argue that people are less involved on a daily basis
with their neighbors—and more with people elsewhere—than
they were a century ago, but the degree of that change is as yet
unestimated. Such change may also be a result of other phenomena in
the early 20th century—rural to urban migration, the streetcar
in cities, and the automobile in rural areas—rather than new
communications.
In a sense, the questions first raised by the University of
Chicago school of sociology (e.g., Park, 1916, 1955) in the early
part of this century persist in their relevance: How does community
form out of the ferment of diverse cultural experiences? How does
democracy emerge from the diverse cultural experiences of
immigrants? At the end of the 20th century such questions are still
being asked; but whereas the Chicago school focused on the role of
the newspaper as an agent for assimilation and teaching democracy,
the question today is under what conditions new information
technology and media will bring Americans together or pull them
apart. Box 2.1 illustrates some interesting areas meriting further
exploration.
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BOX 2.1
Community in the Information Age
Interface between the household and the community. How
does the transformation of household functions enabled by
information technologies alter an individual's expectations of
community?
Political values. Does identification with networked
communities affect Americans' construction of democratic
participation, responsibilities, and obligations? Will Americans
devalue political values associated with geographic community as
they integrate into networked communities?
Virtual communities. Are they communities? In what ways
do people enact the rights and responsibilities of citizenship in
virtual communities?
Networked communities and the elderly. To what extent
does participation in networked communities enrich the lives of the
elderly and/or contribute to alienation from geographic
communities?
Families. Does Internet use by families contribute to the
establishment and maintenance of family networks? How fragile are
these networks?
Friendship. Does making friends in cyberspace enrich or
fragment emotional life? Does dependence on cyber friends result in
lower motivation to develop friendships with those close by?
Computer networks as social networks. How social are
computer networks? What needs do they meet or fail to meet?
2.1.4 Education
Increased use of computing technologies in K-12 education is
giving rise to important new areas for social science research. The
Internet has penetrated rapidly and extensively into U.S. public
schools. A U.S. Department of Education survey found that as of
fall 1996, 65 percent of schools had access to the Internet;
penetration had increased by 15 percentage points in each of the
prior 2 years (Heaviside et al., 1997). The Office of Technology
Assessment (OTA) estimated that in 1995, U.S. schools had 5.8
million computers for use in instruction—about one for every
nine students (Office of Technology Assessment, 1995).
However, the presence of computers for instruction does not
necessarily translate into student use of computers for
instruction. The OTA reported that despite the presence of close to
6 million computers for instruction in the nation's schools (in
1995; presumably there are more now) students spent only about
2
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hours a week using them. Like factories at the introduction of
the electric dynamo or business at the introduction of computing
technology, schools and teachers may not yet have learned how to
modify work practices and organizational structures to take
advantage of computing and communications technology. Schools have
in general not found it easy to use technologies effectively for
improving teaching and learning.1
Nevertheless it is important for policy makers, educators, and
parents to understand what could be accomplished with computing
technology in schools under optimal conditions.
Although a variety of proposals have been advanced to increase
the availability of computers and Internet connectivity, and
substantial investment made in purchasing technology, relatively
little attention has been paid to how they will be used once they
are in place. Because of the decentralized nature of U.S.
education, it is difficult to understand for the nation as a whole
the breadth and depth of change in educational practice and
outcomes associated with the increasing presence of computing and
communications technology in schools and classrooms. While many
state departments of education and local districts are implementing
new programs with a technology component, efforts to design and
employ measures of effectiveness that would allow policy makers and
parents to compare across projects are generally lacking.
A recent report of the President's Committee of Advisors on
Science and Technology, Panel on Educational Technology, stresses
the importance of experimental research in exploring what
educational approaches are most effective (PCAST, 1997; see Box
2.2). The report notes that research on educational technology has
received minimal funding relative to total national spending on
K-12 education, and it urges increased investment. One of the major
research categories proposed is the need for rigorous empirical
study of which approaches to using information technology in
schools are most effective.
The starting point for empirical study is descriptive
inventories of projects with comparable measures of effectiveness,
which would provide an exceptionally useful knowledge base. Such a
study can take advantage of natural variation across states and
school districts and would not require active intervention.2
This mapping of the range of endeavors under way would lay the
foundation for the second phase, a more intensive study of how best
to use computers in education. It would be worth considering how to
organize, fund, and research a small number of schools as
demonstration sites where work practices and organizational
structures are radically redesigned to improve teaching and
learning through technology. To achieve a fair demonstration,
schools would have to be paired with a second set of schools
matched according to student and staff demographics and
capabilities. The second set would receive economic resources
comparable to those of the first set that they could deploy in a
range of other ways. Although natural variation among schools would
be sufficient for the descriptive phase, this active intervention
is required for the second phase in order to derive useful
conclusions in the short run.
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BOX 2.2
Research Recommendations of the President's Committee of Advisors
on Science and Technology, Panel on Educational Technology
1.Basic research in various learning-related disciplines
(including cognitive and developmental psychology, neuroscience,
artificial intelligence, and the interdisciplinary field of
cognitive science) and fundamental work on various educationally
relevant technologies (encompassing in particular various
subdisciplines of the field of computer science).
2.Early-stage research aimed at
developing innovative approaches to the application of technology
in education which are unlikely to originate from within the
private sector, but which could result in the development of new
forms of educational software, content, and technology-enabled
pedagogy, not only in science and mathematics (which have thus far
received the most attention), but in the language arts, social
studies, creative arts, and other content areas.
3.Rigorous, well-controlled, peer-reviewed,
large-scale (and at least for some studies, long-term), broadly
applicable empirical studies designed to determine not whether
computers can be effectively used within the school, but rather
which approaches to the use of technology are in fact most
effective and cost-effective in practice.
SOURCE: Reprinted from PCAST (1997), p. 53.
The politics and economics of designing and
running such demonstration studies would be enormously complex and
contentious. Yet, currently, school districts and teachers are
making decisions about how to allocate resources of both money and
time for technology-related efforts, without the benefit of good
information about the potential consequences of their decisions. A
series of discussions is called for that would involve both the
public sector and the private sector—and would include
educators, parents, technologists, and researchers—in
exploring the feasibility and usefulness of such demonstration
projects.
A significant opportunity to study the use of information
technology in the public schools is presented by the Schools and
Libraries Universal Service Fund, which was established as part of
the Telecommunications Act of 1996. With funding of up to $2.25
billion per year, the program will provide discounts on
telecommunications services, Internet access, and networking, with
the largest discounts going to rural and inner-city communities. By
enabling a large number of schools to acquire new technology, this
program in effect creates a large-scale "laboratory" where the
sorts of research described above could be conducted.
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2.2 Social Infrastructure: Universal
Service
Formulating public policy on aspects of social infrastructure
such as universal access to telephony and other communications
services requires decision making about how large amounts of money
are allocated and how broad segments of society are served.
Although the debate about such questions may often take on a
political cast, both empirical research and the application of
social science theory offer much to help guide public policy making
and the investment of public resources.
Since the value of a network—such as the public telephone
network or the Internet—depends on the total number of people
connected to it (a phenomenon known as ''network externalities"),
it is often argued that access to networks should be universally
provided. Universal service has long been part of U.S.
telecommunications policy, and there are those who argue that
universal service is an appropriate public policy goal for Internet
access (see, for example, Anderson et al., 1995).3
Whether or not one agrees that universal service for networks is
an appropriate objective of public policy, it is worth pointing out
that the historical evidence suggests that there would be
widespread popular support for applying universal service policies
to new networks made possible by advances in technology.
Historically, in several instances, the political demand for
universal service has repeatedly induced Congress to ensure
universal service at uniform rates.
For example, a postal service available to all was established
by the Constitution. Initially (in 1792), postal rates for a
first-class letter depended on the distance it was to be carried: 6
cents for fewer than 30 miles, 8 cents for 31 to 60 miles, and so
on through nine rate classes to the highest rate of 25 cents for
more than 450 miles. In 1845 the rate structure was collapsed to
only two categories, 5 cents for not more than 300 miles, and 10
cents for more than 300 miles. In 1863 a uniform rate (3 cents)
regardless of distance and free intracity delivery were established
(U.S. Bureau of the Census, 1975). Rural free delivery began in
1896. Subsidized Parcel Post became effective in 1913, effectively
connecting rural residents to the advantages of city department
stores through mail-order houses like Sears-Roebuck and Montgomery
Ward. A premium for airmail delivery was dropped in 1978.
For services provided by private businesses, government
regulation was often used to ensure universal service and
nondiscriminatory rate structures. Railroad rates were regulated by
the Interstate Commerce Commission (ICC) beginning in 1887.
Interstate telephone rates were regulated by the ICC and later the
Federal Communications Commission beginning in 1919. Intrastate
telephone calls were made subject to state regulatory authority.
Telephone companies were required to charge a uniform fee for
service connection. Cable television rates and access have also
been regulated.
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Government ownership, government subsidies and loans, and direct
government programs have been used to ensure universal network
services. Land grants and other government assistance brought
railroads to every city in the country. The Rural Electrification
Administration was established in 1935 to extend electrical service
to areas where high construction costs and low population density
had made private service unprofitable. The federal highway program
and later the federal Interstate Highway System connected every
congressional district to the national transportation network.
Education can also be thought of as a good with substantial
network externalities. In the United States, elementary education
has been provided universally (and compulsorily after the 1880s),
and secondary education has been provided universally since the
mid-1940s. College education has been subsidized by the state and
federal governments since the Land Grant Universities were
established shortly after the Civil War. Increasing fractions of
the population have benefited from government-subsidized higher
education. Special programs have been introduced to assist the
children from low- and middle-income families to pay the cost of
college.
Two points about these government efforts to foster or mandate
universality for network goods need to be stressed. First, all of
these congressional and state efforts were designed to accomplish
(as much as possible) universal geographic connectivity. Thus
letters with 32-cent stamps are delivered to remote sites in the
Alaskan north, in mountainous wilderness, and on small, but
inhabited, islands. Even Hawaii has an interstate highway! Rural
residents received telephone and electrical service just as their
city cousins did. Second, the principle of universality was to
extend to people in all income classes, rich and poor alike. This
has often gone beyond establishing uniform rates for service to the
creation of subsidized "lifeline" rates for basic service at prices
presumably available to even the poorest families.
The political logic behind these moves is threefold. First, they
have been defended as required by the principle of democracy.
Individuals cannot effectively participate in the democratic
process if they do not have equal and unrestricted access to
the main methods of communication and transportation. Thus as
increasing fractions of the population become connected to a
network, those left unconnected become an increasing burden on the
democratic principle, and the cost of subsidizing their inclusion
becomes smaller and smaller. Sooner or later the political calculus
tips the balance toward a policy of guaranteeing universal service.
The second principle that has been applied is the desirability of
equal opportunity. As economic development proceeded, both
high-income occupations and low-cost access to the most diverse
array of consumer goods being produced became concentrated in the
urban areas. Federal action was seen to be required to keep rural
Americans abreast of these advances. Farmers, too, it was argued,
should share in the opportunities and wealth created by the new
technologies. The third argument used to defend special programs
for the poor was the
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argument that connection to a network was essential or at least
very helpful for self-advancement. Basic education is necessary to
become employable. More education is probably better. Basic
telephone and electrical service is probably necessary to hold a
good job and to seek out better opportunities. The political fear
is that unless government redistributive actions are taken to
include the poor in the network, their lack of connectivity will
doom them and their children to permanent poverty.
Although it is certainly true that widespread availability may
increase the value of a network, it is not necessarily the case
that such access will occur only with government provision or
subsidies. After all, many goods with network externalities are
provided by the private sector, including our fax machines, video
player/cassette market, and so on. Indeed, only a couple of years
after the Anderson et al. (1995) report, for-profit firms such as
Hotmail4 began offering free e-mail,
supported by advertising.
Basic telephone service has long been regarded as a social good
that required a deliberate policy effort to achieve universal
access. However, a close reading of history suggests another
possible conclusion. According to Mueller (1997), penetration of
basic telephone service could easily be comparable to today's
rates, even if there had been no policies of subsidized access.
Various comments to the FCC in its recent docket on universal
service reform indicated that the current structure of pricing in
telephony is costing the United States billions of dollars, with
very little impact on penetration rates for basic telephone
service. These deadweight losses arise because the prices of
services such as long-distance calling, for which demand is
sensitive to price, are set well above cost, and the prices of
price-insensitive services, such as basic service, are often below
cost, in direct violation of the economic principles of efficient
pricing to cover joint and common costs ("Ramsey pricing"; see
Kahn, 1970).
Advocates of universal service for the Internet or telephony
typically make their case on grounds of geography or of income. One
can well see why interested parties might argue for geographic
subsidization: economic theory suggests that most of the benefits
of providing services to isolated areas will be captured by those
who own land in those areas. Land with electricity, telephone, and
road service is certainly more valuable than land with none of
these features, and it is, of course, appealing to those who own
the land to have someone else pay for such improvements.
Geographical concerns also flow from the interest in social and
economic development in rural areas. This was a past concern in the
United States for telephony, and it remains an issue for expansion
of new broadband services to rural areas. Rural access to even
basic telephony remains a major issue in many developing countries.
Whether cross-subsidies are the appropriate means to fund the
expansion of rural telecommunications services is an area of
ongoing public policy debate.
With respect to income arguments for universal service
subsidies, it is also
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(Coase, 1959). These auctions are generally regarded as having
being quite successful.31 See
McMillan (1994) for a readable introduction to how the FCC auctions
were conducted.
The economic analysis starts by considering two sorts of
auctions: commonvalue auctions and private-value auctions. In a
common-value auction, such as the auctioning of offshore oil
drilling rights, the item that is being bid for is worth some
particular amount, but the bidders may have different opinions
about how much that amount is. In a private-value auction, the item
in question is worth different amounts to different people. Most
auctions of ordinary consumer goods such as works of art and
antiques are of the private-value type. For more on the theory and
practice of auctions, see the survey by Milgrom (1989) and the
references cited therein. See also the discussion in Box 2.8.
2.4.9 Electronic Commerce
Electronic commerce is different from physical commerce because
technology changes the modes of communication, ultimately affecting
the flow of information. The reduced cost of communicating,
transmitting, and processing information is at the core of these
differences. The marginal cost of disseminating information
electronically to new or existing customers is lower than with more
conventional methods, since the cost of an additional Web query or
e-mail message is close to zero. Similarly, customers can use the
Internet to search across competing sellers—which can be done
directly by visiting various sellers' Web sites and inquiring about
prices, products, and availability. Increasingly, searches can also
be facilitated by using ''intelligent agents" or intermediaries
that can gather and aggregate the necessary information on behalf
of the customer. As a result, geographic and informational barriers
that dampen competition among sellers may become increasingly
irrelevant.
Bakos (1997) has analyzed the implications of reduced search
costs for competition, efficiency, and the division of surplus
between buyers and sellers. His model indicates that when
electronic marketplaces reduce the costs to the consumer of
searching for the lowest price, there will be (1) an improvement in
overall economic efficiency and (2) a shift in bargaining power
from sellers to buyers. As a result buyers will be strictly better
off, but the effect on sellers is ambiguous. A change from very
high to moderate search costs will tend to make sellers better off,
as new markets emerge. For instance, a market for specialty car
parts might be unsustainable without a technology like the Internet
to lower the transaction costs involved in finding buyers and
sellers. The creation of such a market provides new opportunities
for sellers. However, Bakos's model indicates that if search costs
continue to fall, sellers may be made worse off since buyers can
more easily find the seller that offers the lowest price. Since all
sellers charging more than this lowest price will lose business,
competition will tend to drive down prices until they reach the
marginal cost of the product, leaving no
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BOX 2.8
Simple Insights Learned About Auctions
Common-value Auctions
A sensible strategy in a common-value auction, it would seem,
would be to estimate the value of the item in question, add on a
profit margin, and then bid that amount. However, if everyone uses
such a procedure, it follows that the winner will tend to be the
bidder with the highest estimate—which then is likely to be an
overestimate of the true value. Hence the "winner" will usually end
up overbidding, a phenomenon known as the winner's
curse.
Avoiding the winner's curse involves bidding down from one's
estimated value, with the reduction depending on the number of
other bidders. If one's estimate is higher than the estimates of 2
other bidders it may be reasonably close to the true value; but if
it tops the estimates of 100 other bidders, it is almost certainly
an overbid!
Economists have developed a number of statistical and game
theoretical models of bidding behavior in such markets that have
been applied successfully in practical contexts such as auctions of
parts of the radio spectrum.
Private-value Auctions
The most common form of private-value auction is the English
auction, in which bids are successively raised until only one
bidder is left who then claims the item at the last price bid. In
this kind of auction, the person who is willing to bid the
highest gets the item, but the price paid will generally be
slightly above the bid of the second-highest bidder.
Sealed-bid Auctions
In a sealed bid auction, each consumer submits a bid
sealed in an envelope. The bids are opened and the item is awarded
to the highest bidder at the price he bid. The optimal strategy in
the sealed-bid auction is to try to guess the amount the other
consumers will bid, and then enter a bid slightly above the highest
of these, assuming that the item is attractive to the bidder at
that price. Thus bidders will not, in general, want to reveal their
true valuation for the item being auctioned off. Furthermore, the
outcome of the sealed bid auction will depend on each bidder's
beliefs about the others' valuations. Even if these beliefs are
correct on average, there will be cases in which the bidders guess
incorrectly and the item is not awarded to the person who values it
most.
Vickrey Auctions
A variation on the sealed-bid auction—known as the "Vickrey
auction," after the economist who first analyzed its
properties—eliminates the need for strategic play. The Vickrey
auction simply awards the item to the highest bidder, but at the
second highest price that was bid. it turns out that in such an
auction, there is no need to play strategically—the optimal
bid is simply the true value to the bidder.1
It is also worth observing that the revenue raised by the
Vickrey auction will be essentially the same as that raised by the
ordinary English auction, since in each case the person who
assigned the highest value gets the item but only has to pay the
second highest price. (In the English auction, the person
willing to bid the highest gets the item, but he or she has to
pay only the price bid by the person with the second highest value,
plus the minimal bid increment.)
1The essence
of the argument can be seen in a two-bidder example. Let
v1 be the true value of bidder
1, and let b1 and
b2 be the bids of the two
bidders. Then the expected payoff to consumer 1 is
If v1 ‹
b2 then bidder 1 would like the
probability to be equal to 1—which he can assure by reporting
b1 = v1.
If v1 › b2, bidder 1 would like the probability to
be zero—which he can ensure by reporting b1 = v1. Either way, it is optimal for bidder 1
to report the true value.
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surplus for the sellers (Bakos, 1997). The dynamics of
"friction-free" capitalism are not attractive to sellers of
commodity products who had previously depended on geography or
customer ignorance to insulate them from the low-cost seller in the
market. As geography becomes less important, new sources of product
differentiation, such as customized features or service or
innovation will become more important, at least for those sellers
who do not have the advantage of the lowest cost of production.
Is this kind of dynamic already emerging in Internet commerce?
Although there is much speculation about the effect that the
Internet will have on prices, thus far there has been virtually no
systematic evidence obtained or analysis done. However, one
exploratory study by Bailey and Brynjolfsson (1997) did not find
much evidence that prices on the Internet were any lower or less
dispersed than prices for the same goods sold via traditional
retail channels. Their analysis was based on data from 52 Internet
and conventional retailers for 337 distinct titles of books, music
compact disks, and software. Bailey and Brynjolfsson provided
several possible explanations for their unexpected findings,
including the possibility that search on the Internet during the
sample period was not as easy as is sometimes assumed, that the
demographics of the typical Internet user encouraged a higher price
equilibrium, that many of the Internet retailers were still
experimenting with pricing strategies, and that Internet retailers
were differentiating their products (e.g., by offering options for
delivery or providing customized recommendations), which added
value. Because of the rapid pace of change in Internet commerce, it
is not clear whether their findings will apply to current and
future periods. However, they have suggested the need for close
examination of the common assumption that the Internet will be
simply a "friction-free" version of the traditional retail
channels.
Despite the uncertainties about electronic commerce and
relatively few attempts to look at the broad picture, there is a
great deal of private-sector interest. Electronic commerce is also
receiving increasing attention from policy makers. The Clinton
Administration's Framework for Global Electronic Commerce
(1997; available online at
‹http://www.whitehouse.gov/WH/New/Commerce/index.html›)
highlights both the economic potential of electronic commerce via
the Internet as well as the need for government to avoid undue
regulatory restrictions and to not subject Internet transactions to
additional taxation.
Right now society is in a period of intense speculation and
experimentation. Experimentation involves a risk owing to
path-dependence—technological choices made in the past may
constrain what technological options will be compatible in the
future. Standards developed now for electronic payment may remain
in use well into the future, and careful thought should be given to
their implications. For example, some of the architectural design
of the Visa-MasterCard "Secure Electronic Transactions (SET)"
technical standard was necessitated by the need to conform with
current cryptographic export control policies. Yet these policies
are today very much in flux and may be entirely different in a few
years. Migrating the SET standard so that it is consistent with
these new policies could be very costly, if not impossible.
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Even if cryptography policy changes, society may be locked into
design choices already made. Thus it is critically important that
any such standards be examined by those with expertise in
technology, economics, business, and law—no one discipline
suffices to provide the necessary expertise.
One important insight about electronic commerce that follows
from a legal and economic analysis has to do with assignment of
liability, that is, with who ends up bearing the costs of
unexpected outcomes. If the goal is to minimize overall transaction
costs, liability should be assigned most heavily to those who are
best placed to reduce the costs of transactions.
Consider, for example, the rule in the United States that the
consumer is liable for only the first $50 in losses from fraudulent
credit card use. This assignment of liability has led to the
development of highly sophisticated statistical profiling of
consumer purchases that allows companies to detect fraudulent
activity, thereby reducing the total costs of transactions. If the
liability had instead rested entirely with consumers, one might
have expected to see them being more careful in protecting their
credit cards, but there would have been little reason for banks to
invest in risk management technology. Another example is the
difference between U.S. and U.K. assignment of liability for
automatic teller machine (ATM) fraud. In the United States the
burden of proof lies with the bank; in the United Kingdom it lies
with the customer. This has led U.S. banks to invest in video
cameras at ATM machines, whereas U.K. banks typically have not made
such investments.
The issue of liability is critical for electronic commerce. A
survey released in March 1997 by CommerceNet/Nielson Media Research
(1997) found "a lack of trust in the security of electronic
payments as the leading inhibitor preventing people from actually
purchasing goods and services online." This is remarkable
considering the fact that the standard $50 limit still applies to
online credit purchases. One might conjecture that credit card
companies are not interested in a marketing effort to educate the
public on this issue until they understand their own potential
liabilities for fraud and misuse. There is also a need to
understand the psychological and social dimensions of "trust,"
since trust is a critical component of any sort of commercial
transaction.
The information economy calls for new economic institutions such
as "certificate authorities" that certify the connection between
legal identities and possession of cryptographic keys—a
public-key infrastructure. Large certificate issuers include
Versign, which has close ties to the credit card issuer Visa, and
GTE, which has close ties to MasterCard. The economics of this
industry are uncertain and clearly depend critically on the issue
of liability assignment.
Another factor that is potentially delaying the growth of
electronic commerce is intellectual property protection. Some of
the broader issues are dealt with in section 2.4.1, "Protection of
Intellectual Property," but some of the specifically
commerce-oriented issues are mentioned here.
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The first such issue is the role of copy protection, which is a
technical means for making it more difficult to create additional
functional copies of software in a competitive environment.
Copy-protected mass-market software was effectively competed away
during the mid-1980s. Any copy protection that inconveniences users
is difficult to maintain in a highly competitive market. See Shy
(1998) for an economic analysis.
More generally, numerous copy protection schemes have been
proposed to help safeguard intellectual property, suggesting that
there will almost certainly be a standards battle for supremacy in
this market. Besen and Farrell (1994) have provided a survey of
economic analysis with regard to conflicts about standards that
sets forth the current state of the art in this area. More work in
this area would be valuable.
Electronic commerce also raises significant antitrust issues.
There are large economies of scale in distribution—a single
general-purpose online bookstore or CD store can serve a very large
market. There are also potential demand-side economies of scale in
payment mechanisms and software, which leads to a winner-take-all
market structure with a single firm (or small set of firms)
dominating the market.
There have been a number of interesting studies of market
structure in this context (see, e.g., Katz and Shapiro, 1994, for a
survey); however, much more work is needed. The role of antitrust
policy in an industry with strong network externalities and
standardization issues is especially important to understand. A
dominant firm brings the benefits of standardization, but
presumably also imposes inefficiencies due to its monopoly
position. The social trade-off between these benefits and costs is
critically important and is the subject of much current debate.
Some dispassionate analysis would be highly welcome.
There has been much speculation about the macroeconomic effects
of electronic commerce, such as the loss of economic sovereignty.
Most economic analysis has focused on moving from multiple
currencies to a single currency (as in the European Union context),
but the emergence of currencies issued by private companies and
barter arrangements is a distinct possibility. Economic monetary
history would likely shed some light on how an economy functions in
the presence of multiple private currencies, since that
circumstance was common up until the turn of the last century.
There is also the question of who will appropriate the benefits
of electronic commerce. Varian (1996a) has argued that price
discrimination will become a widely used approach to selling
information. (One form of price discrimination is enabled by
bundling, discussed in section 2.4.6, "Pricing Information.") He
cites earlier studies that suggest that the welfare effects of
price discrimination will be benign from the viewpoint of overall
welfare, but price discrimination may certainly affect the division
of economic gains between consumers and firms. These earlier
studies typically assumed a monopolistic market structure, which
may or may not be appropriate for electronic commerce. Thus
extending
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these models to more competitive market structures would enhance
understanding of the likely impact of electronic commerce on
consumers.
2.5 Illustrative Broad Topics For
Ongoing Research
Workshop discussions and position papers yielded numerous
suggestions for research topics, a number of which are discussed
above. From these topics—spanning a wide range of
interdisciplinary subjects from economic productivity to
communities in the information age—the workshop steering
committee selected an illustrative set of promising areas for
research, listed below.
•Interdisciplinary study of information indicators. The
idea of developing a method for quantifying certain aspects of
society in the United States is as old as the Constitution. Over
the last two decades, researchers have recognized and begun to
analyze the increasing role that information plays in all aspects
of society. These efforts have proved most fruitful when measuring
the contribution of information to the economy,32 the size of the information work
force,33 and the level of
penetration of the information infrastructure.34 In most of these analyses, the
conclusions drawn have been consistent with the view that society
is in the process of a fundamental change through the rapid
development and implementation of information technologies and the
products and services associated with them.
Some of these studies raise the indirect question
of the value of attempting to use a set of indicators to represent
the information activities of society, such as public discourse and
democratic processes, to improve understanding. This approach was
first pioneered by Borko and Menou (1983). In essence, looking at
society from an information perspective leads us to perceive
society as composed of information structures and communication
behaviors. In other words, those activities that lead to the
construction of environments for producing, receiving,
distributing, and processing information reflect the creation of
information structures, while those activities that involve
transmission of information reflect communication behaviors. Box
2.9 lists some notional indicators.
The dramatic information-centric changes that have
occurred across all societies in recent decades suggest that the
social forces enabled by the development of information structures
and the prevalence of communication behaviors be measured. More
fully developed, a set of quantitative information indicators
offers opportunities for comparatively measuring community
information assets, public participation, interconnectedness,
social capital, information poverty, and universal service.
It would be useful for the nation to invest in an
interdisciplinary study of information indicators. The perspectives
of many disciplines come to bear on the question of measuring
impact. An exploration of how different disciplines do or do not
reach consensus about how to measure impacts, and the extent to
which consensus is desirable, is called for. From such an exchange
can come broadly
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BOX 2.9
A Primitive List of Information Indicators
Information Structures
Books produced (general/textbooks)
Cable TV access/trunk lines
Number of cinema seats
Number of computer systems/databases
Number of database subscribers
Number of journal articles/technical
reports
Number of libraries/archives
Number of modems
Number of movies released
Number of newspapers
Number of online subscribers
Number of personal computers
Number of registered computer users
Number of satellite dishes
Number of telephones
Number of TVs/radios
Number of periodicals published
(general/scientific)
Number of public telephones
Number of radio/TV channels
Number of telephone access/trunk
lines
Communication Behaviors
Circulation of library volumes
Domestic/international mail traffic
First-class letters mailed
Hours spent accessing the Internet
Hours spent listening/viewing
radio/TV
accepted measures of access, use, and the impact
of information and information technology. One particular outcome
could be the aggregation of the kinds of micronindicators listed in
Box 2.9 into broadly accepted macro information indicators such as
the following:
—Interconnectivity index. A measure of the facility of electronic
communication, and an evaluation of the development of this
dimension of the information infrastructure;
—Information quality of life index. Similar to an index produced
by the Organisation for Economic Cooperation and Development, an
index that would attempt to evaluate the qualitative levels of
communication available to individuals;
—Leading information indicators. An index that would attempt to
predict the growth of the information infrastructure;
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—Home media index. An index of the
state of penetration of communications technologies in the home
that might qualify as a leading index of the potential for future
consumption of information; and
—Marginalization index. An index
that would measure the extent to which specific populations are
excluded from participation in the information
infrastructure.
Were such a set of indicators developed, funding
agencies like the National Science Foundation might have a
standardized tool in hand through which to assess the outcomes of
the research that they sponsor.
•Impacts of information technology on labor market
structure. Information technology has been linked to wage
inequality and other changes in the structure of the labor market
(more detail is provided in section 2.3). Understanding the extent
to which and the mechanism by which computers may affect increased
wage inequality is important in determining the nature and extent
of public policy responses. This research should acknowledge that
computers, by themselves, are not causal agents. Rather it is the
entire constellation of economic and organizational strategies,
managerial perspectives, and work practices within which computing
technology is embedded that affects wage inequality.
One possible response is improved training of
workers for IT-related jobs. Understanding the needs for education
and training requires better definition of the skills required to
make use of IT. Results from such research would benefit both
policy makers and the private sector as they seek to better match
education and training to workplace skill requirements.
•Productivity and its relationship to work practices and
organizational structures for the use of information
technology. Extracting the benefits of new technologies depends
in part on organizational adaptation to them. As discussed in more
detail above, industrial exploitation of the benefits of the
electric dynamo in the early part of this century required new
approaches to manufacturing. Organizations using information
technology today are at a similar learning stage.
A major impediment to determining optimal work
practices and organizational structures has been the lack of a
clear picture of what data already exist. Developing such a list
would help speed up research in this area. There are a number of
places where specific research needs are already apparent, such as
the collection of time series data to help clarify the role of
technology in organizational changes.
Understanding the productivity benefits of
information technology—illuminating the so-called productivity
paradox—also is worthy of continued research. Important
questions include how to better quantify what have been
considered
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"unmeasurable" economic inputs, such as
organizational knowledge, and "unmeasurable" outputs, such as
product quality, associated with computers.
As recognition grows that productivity gains from
information technology increasingly depend not just on the
introduction of new technology but also on finding new ways and
organizational structures to use it, it is worth noting that
advances in the technology have owed much to government-supported
computer science research. Advances in economic productivity would
benefit from analogous research on how to better use information
technology in the workplace. This is one facet of the broader
question of learning how to better use information technology to
achieve a host of social and economic goals. There are already
moves to increase research in this domain; one example is the
National Science Foundation's interdisciplinary Knowledge and
Distributed Intelligence initiative.
Intellectual property issues. Information technology
raises many new questions about optimal protection of intellectual
property rights, posing challenges to policy makers revising
intellectual property law or international agreements as well as to
commercial interests considering particular intellectual protection
schemes. Many new schemes have been advanced for protection of
intellectual property, and more needs to be known to choose among
them. While considerable research has been conducted on the effect
of different patent regimes on innovation, little has been studied
regarding the consequences of different copyright protection
schemes (see section 2.4.1). Theoretical work and empirical
research on different copyright protection regimes will help inform
future actions to protect intellectual property.
•Social issues addressed at the protocol level. The
Internet has given rise to many new social issues in intellectual
property, privacy, and data filtering. Addressing these social
issues at the protocol level—through policies, rules, and
conventions for the exchange and use of information—is a
promising area for interdisciplinary research. Examples
include:
—PICS, the Platform for Internet Content Selection,
which implements a set of protocols for rating Web sites (Resnick
and Miller, 1996);
—P3P,35 a project for specifying privacy practices;
—Language specifying the terms and conditions by
which intellectual property is managed; and
—Open Profiling Standard,36 a method for
individual users to selectively release information about
themselves under specific conditions.
Each of these projects involves both technological
and social dimensions. For example, PICS raises issues not only
about how best to encode ratings for Web sites, but also about how
to represent them; cognitive issues about how elaborate the rating
schemes should be; and economic issues about how rating bureaus can
recover costs. Another issue is how users can evaluate the
trustworthiness of the labels provided by ratings services.
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Notes
1. See Tyack and Cuban (1995) for an analysis of why earlier
technologies for improving teaching and learning never achieved
their promise. See also references in CSTB (1994b, 1996c).
2. "Active intervention" refers to deliberate
intervention—such as the introduction of new technology or
educational practices—for the purposes of research.
3. While this discussion focuses on this question in a U.S.
domestic context, in much of the rest of the world, socioeconomic
disparities and the gap between urban and rural access are much
greater.
4. See ‹http://www.hotmail.com›.
5. Note, however, that not all forms of communication
necessarily reduce localness. For example, Wiley and Rice (1933)
postulated that the telephone, a point-to-point medium, reinforces
locality whereas broadcast media tend to diminish the importance of
locality.
6. This work updated earlier work conducted at a time when
computing was less prevalent.
7. The "output effect" also includes changing tastes or desires,
e.g., the changes in preference for cars rather than horses or for
word processors rather than typewriters.
8. One might expect software development to contribute to
increased demand for skilled work, but recent work by Brynjolfsson
(1997) found that it was not a major factor, at least not in most
industrial countries. Although the U.S. software industry is fairly
large and growing, it is still not large enough to explain any
significant share of the effect.
9. See Brynjolfsson (1993), Attewell (1994), Sichel (1997), and
CSTB (1994a) for empirical studies of the productivity paradox. See
CSTB (1994a), Baily and Chakrabarti (1988), Brynjolfsson (1993),
Wilson (1995), and Brynjolfsson and Yang (1996) for reviews.
10. Concurrent engineering refers to the practice in which
personnel from every phase of product development—e.g., from
design to production engineering, quality control, and
service—collaborate in product development beginning at the
earliest stages.
11. Note that improvements in the technology for transmitting
and manipulating image data increasingly remove this
limitation.
12. With the exception of the retirement-planning task force,
the studies of differential benefits cited in this section used
survey analysis of naturally occurring differential use.
Statistical techniques were used to control for the effects of
other variables, but because people were not randomly assigned to
the use (or nonuse) of technology, strict causal claims are not
warranted. In the retirement-planning study, still-employed and
recently retired people were randomly assigned to task forces with
and without access to technology. Because of the random assignment,
causal claims are warranted.
13. U.S. Copyright Office records on documents registered for
copyright are available via the Library of Congress Information
System (LOCIS) for 1978 onward.
14. Figures on literacy are not always reliable, in part because
the definition of literacy is somewhat vague. The numbers given in
this discussion were taken from contemporary accounts.
15. Early expectations were that interactive cable services
providing video on demand (VOD) or near-VOD would be lucrative and
popular. However, early experiments by the cable industry showed
that consumer response to VOD was unlikely to generate sufficient
revenue to justify investment in interactive cable systems.
Investment in two-way capabilities in the cable industry today is
predicated on a market for broadband data delivery (including
Internet as well as telephony and video conferencing) to both the
home and small businesses, in addition to video programming.
16. See ‹http://www.cyberpatrol.com/›.
17. This set of protocols was adopted as a standard by the
consortium that sets standards for the World Wide Web.
18. EPIC (see
‹http://www.epic.org/privacy/privacy_resources_faq.html›)
contains an extensive list of online resources on privacy
issues.
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19. This study is based on a sample of 1,009 computer users
derived from a sample representative of 2,204 persons, age 18 or
over, living in households with telephones and located in the 48
contiguous states.
20. Note that federal legislation passed in 1994 (which did not
come into effect until 1997) allows people to restrict the release
of personal information from state motor vehicle records.
21. See
‹http://www.sims.berkeley.edu/resources/infoecon/Security.html›.
22. See ‹http://www.melvyl.ucop.edu/›.
23. Branding is an effort to transform something perceived as
generic into something with which people associate a brand name. A
recent example is the ''Inside Intel" campaign, which built up
significant brand awareness for CPUs, something that the average
individual cared little about.
24. "Push" technologies send information to an intended consumer
without that consumer having requested it, while "pull"
technologies send information only in response to a specific
request. Radio and television broadcasting and e-mail are examples
of push technologies, because they both transmit information
regardless of whether or not anyone specifically requested it; the
World Wide Web is an example of pull technology since a page must
be requested before it is sent. Note that push technologies can be
used over the Internet as well; examples include the PointCast
system, which delivers customized news to users' computer
desktops.
25. The National Library of Medicine's MEDLINE system makes
extensive bibliographic information covering the fields of medicine
and health care available free of charge to the public through a
Web site.
26. The Electronic Data Gathering, Analysis, and Retrieval
system makes available to the public through a Web site much of the
information companies are required to submit to the U.S. Securities
and Exchange Commission.
27. Such a gap exists, for example, between various
socioeconomic groups, between urban and rural areas, and between
industrialized and developing countries.
28. Also see Markus (1987) on the theory of critical mass for
interactive media.
29. See ‹http://raven.stern.nyu.edu/networks›.
30. Herodotus describes the use of auctions in Babylon as early
as 500 BC. It is remarkable that a venerable economic institution
like an auction has found a receptive audience on the Internet. The
Internet Auction List (‹http://www.usaweb.com›) lists
more than 50 sites that have regular online auctions, and more are
being added every day. Computer equipment, air tickets, and Barbie
dolls are being bought and sold daily via Internet auctions. Even
advertising space is being sold via auction on AdBot
(‹http://www.adbot.com›).
31. There have, however, been problems due to overbidding (the
so-called "winner's curse" phenomenon, described in Box 2.8) and
signaling. Signaling can occur in multiround auctions when the bid
values are used to signal the intent of the bidder, in violation of
the rule against there being any collaboration or collusion between
auction participants. For example, a bid of $1,000,202 might
indicate that a bidder has a particular interest in the market with
telephone area code 202.
32. See Jussawalla et al. (1988); Machlup (1962); and Porat
(1977).
33. See Bell (1973); Katz (1988); Machlup (1962); and Schement
(1990).
34. See Dordick and Wang (1993); Ito (1981); and Kuo (1989).
35. See
‹http://www.w3.org/Privacy/Overview.html›.
36. See ‹http://www.w3.org›.
Representative terms from entire chapter:
universal service
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