INTRODUCTION
In the Internet economy many of the theoretical assumptions and historical observations upon which economics rests need to be reexamined. Economics built a very successful research program by focusing on the choices and behavior of rational individual decision-makers under conditions of scarcity.
In this highly stylized framework, eventually increasing incremental costs, decreasing marginal utility and resource constraints result in negative feedback that moves economic processes toward equilibrium states. The rigorous analysis of these equilibria at the micro and macro level is a major achievement of economics. In an economy built around digital technology some of these conditions change fundamentally. Scale economies, interdependencies, and abundance are pervasive and call for analytical concepts that augment the traditional approaches.Technological progress has yielded exponential performance improvements of components and networking during the past decades that have resulted in rapidly declining unit costs for information processing. In addition, economic activities in the digital economy are increasingly interrelated due to complementarities between networks, applications and services, as well as increasingly dense networks of communication between economic agents. Both characteristics contribute to direct and indirect network effects and externalities. Network effects and the ubiquity of high upfront and low incremental costs in many production processes result in significant economies of scale on the supply side and demand side of the market. In the Internet economy positive feedback effects often amplify dynamic processes of change, rendering the central concept of market equilibrium, which has proven such a powerful tool of economic analysis, less germane, perhaps best seen as a special case of a more general theory of a continuously changing economy.
These new conditions have stimulated a plethora of innovative research in economics and related social and engineering sciences. Initial work on the Internet economy applied concepts of industrial organization to examine infrastructure market segments (e.g., backbone markets, access markets, domain names), interconnection, pricing, auctions, non-linear dynamics such as bandwagon effects, and shed first light on multi-sided markets (e.g., McKnight and Bailey, 1997; Madden, 2003; Majumdar et al., 2005).1 Expanding these topics with concepts from information economics, Shapiro and Varian (1999) expertly synthesized the knowledge on information industries, much of it foundational to the Internet. In a similar vein, the economics of network industries (e.g., Shy, 2001) succeeded in generalizing concepts of traditional industrial organization to the specific conditions of the Internet. The discussion has also spawned new fields of inquiry, such as Internet Studies (Dutton, 2013) and the highly interdisciplinary fields of web science, network science, and Internet science (Borner et al., 2008; Hall and Tiropanis, 2012; Tiropanis et al., 2015). Bridging computer science, sociology and economics, some
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of this research has developed sophisticated concepts and rigorous models of highly connected economic processes in networks (e.g., Jackson, 2008; Easley and Kleinberg, 2010; Jackson and Zenou, 2013). This literature is complemented by contributions from statistical physics and network science (Pastor-Satorras and Vespignani, 2004; Newman et al., 2006). Innovative and important contributions were also made by scholars adopting a political economy lens (e.g., Mansell, 2012).
These changing technical and economic conditions also pose significant challenges for managers and policy-makers. In parallel to the emergence of the Internet as a major platform for commerce, an increasing number of publications have been dedicated to business and managerial aspects of the digital economy.
While some of this research aims at understanding sector-wide phenomena, much of it also examines the characteristics of optimal choices and the conditions under which agents - organizations and individuals - are able to realize them (Illing and Peitz, 2006; Peitz and Waldfogel, 2012). Brandenberger and Nalebuff (1996) recognized that the increasingly complex value networks of modern production places firms in ambiguous positions, often having to compete and to cooperate with other organizations. The interrelatedness of markets has led to a burgeoning literature on two- and multi-sided markets (Rochet and Tirole, 2003, 2006; Armstrong, 2006), which is particularly relevant for many digital economy market segments. A vast volume of contributions in the business economics and management literature adds to these analyses (Coyle, 1997; Cortada, 2001).Many of these topics are also addressed in this Handbook but they are approached differently and with a broader audience in mind. We deliberately adopt an inclusive view of the economic discipline, bringing together, in Part II of the Handbook, mainstream, institutional and evolutionary theory, thinking rooted in the theory of complex adaptive systems, as well as approaches from critical political economy. All of these frameworks, although not equally developed at a formal and empirical level, have important bearings on the dynamic Internet sector that often elude the equilibrium-oriented models of mainstream economics. The chapters in Part III are dedicated to the institutional arrangements and technical architecture affecting the Internet. Part IV is dedicated to exploring the business and managerial economic dimensions of the pervasive utilization of the Internet. Although the chapters are authored by experts from different geographic regions, they mostly adopt the perspective of countries in which the Internet is widely available and used. Two integrative chapters in Part V address the past trajectories and possible future development of the Internet.
The remainder of the chapter gives a brief synopsis of the global adoption of the Internet before it introduces the overarching themes of the next four parts of the book and the respective chapters.
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