The Internet: a new information economy?

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The virtual culture

The development of "virtual reality" has given rise to fears that the proliferation of fictitious worlds and the time spent in such environments will ultimately cause Web surfers to lose all sense of reality. Formulated in this way, this fear is groundless; at least since the time of the Lascaux painter, men have always lived largely in imaginary worlds, even if concretely represented. What is new is that, more so than in the past, these worlds will be adapted to everyone’s particular needs and tastes, even going so far as requiring complex pairings in order to enable them to communicate. This is precisely the essence of a virtual reality.

Virtual reality is characterized by the provision of means (ergonomics, software, semantic, etc.) which allow an effective pairing between two environments. This pairing creates a virtual space, seen differently by those involved in it and one in which they can share what is necessary for communication. Between two people, the pairing may consist of filtering and processing elements to be retained in the situation of one of them and that it is appropriate to provide the other with: scene-setting, creation of an avatar, translation of speech in real time (when such software is available), etc. In the case of man/machine relationships, virtual reality consists in providing the means for a mental representation, which permits interaction. In this sense, browsers, which have allowed the Web to develop, have offered users a representation of information as a graph and the ergonomically efficient means by which to travel this graph (hypertext links). In the case of a movie, virtual reality consists in adapting its content to the spectator’s (long and short-term) characteristics - a single movie may therefore be seen differently by different audiences (scene content, plot development, etc.).

As will be seen, evolution of this type does not only cause one’s sense of reality to be lost but destroys reality as the only reference which is identical for everyone. By attributing greater significance to context than to messages, it amounts to as important a revolution as printing was in its time.

Before printing, writing served only as an aide-mémoire in the oral diffusion of texts. The message was supplied with its context (i.e. what it is necessary to know beforehand for the work to be correctly understood). The commentary of the speaker clarified obscure points in the message. To the listener, the sense was rarely ambiguous for long. Printing has not only allowed widespread circulation of texts but has also separated the emission and reception process.

From this standpoint, humanism was characterized by an attempt to reconstruct the context that allowed ancient texts to be understood. This interest in texts considered as context-free entities has, to an extent, conditioned the evolution of western civilization in several fields:

  • the attention given to other civilizations has progressively developed cultural relativism;

  • the difficulty of reconstructing context from the work itself has allowed the development of the modern esthetics based on ambiguity (a work of art is something which is not directly understandable; its value lies mainly in the effort it requires to rebuild the adapted context);

  • the interest in texts which provided their own context quickened the expansion of the scientific method;

  • the fetishism of original texts and contempt for imitation and recomposition, both techniques used in oral creation, have ultimately resulted in a precise definition of the concepts of author and of plagiarism which, in the XIX century gave rise to copyright.

It would obviously be absurd to attempt to describe what a “virtual culture” would consist of. This culture remains to be invented. However, one can imagine that it is the opposite of what has just been described. Value lies no longer in the text but in the context; the notions of original work and of author become blurred in the face of creative tinkering and the combination of existing elements. Symbolism gives way to imaginary process.

By way of conclusion, a number of assertions about the Internet economy are given below. They arise more or less directly from the above analysis on the current development of Web sites. These assertions have been presented as blunt statements in order to form a clear-cut scenario. In a field which is undergoing continual change, like the Internet, such a scenario, even if consistent, should be considered at best as a tentative forecast.

  1. Even after the introduction of secure payment procedures and of micropayment, access to Web sites will be largely free of charge.

  2. All commercial transactions will, in the long term, be initiated on the Internet, i.e. the decision to purchase and the upstream phases of product design will take place on the Web, whilst downstream functions (delivery, invoicing, payment, etc.) will, according to the circumstances, take place either on the Internet (electronic commerce) or via conventional distribution channels.

  3. On the Internet, value lies in the composition of large communities of loyal customers: exploitation of such communities will be based on the ability to mobilize them to invent new products. Web site managers, currently experiencing a deficit (but enjoying high stock-market capitalization), are becoming essential intermediaries in the definition and marketing of practically all products and services.

  4. In the case of companies which concentrate on the creation of customer bases, the firm, defined as all the strategic information to which it controls access, will be replaced by more fluid entities which are more receptive to cooperation with their competitors.

  5. Copyright will progressively be replaced by protection of customer bases and will generate an economy of links on the Web. Free access to information on the net will be compensated by a better exploitation outside the Web, particularly through secondary products.

  6. As the value of information now lies principally in its contextualisation, content (movies, TV programs, books, etc.) will evolve: the concept of author will disappear (distinction between the person who actually creates and the person who signs in order to boost the sell), the products will have very short lives (already visible in publishing), and the content will be more or less automatically adapted to various audiences.

  7. The development of a virtual reality will enable everyone to interact in a relevant manner with a reality whose aspects will have been previously sifted out and prepared to optimize the communication; hence, a transformation of current social controls.

  8. The Internet is unstable, less for economic reasons, as is sometimes imagined, than for political reasons. Digital networks develop free markets so fast that social regulations, legal adaptations and, more generally, State supervision cannot keep up. This could lead to possible reactions of rejection which will affect not only the Internet but also current confidence in the virtues of free markets.

1 For an introduction to the Internet economy and to the relevant data, reference may be made to the 1997 edition of the AFTEL report "Internet: les enjeux pour la France" (by Daniel Kaplan), particularly: "Croissance, usage et utilisateurs de l'Internet" ( ; Daniel Kaplan’s site ( is a good starting point on the Web.

2 "Information economy" will here be used to denote an economy in which information goods, and more generally goods produced subject to substantial economies of scale, represent a significant proportion of production. This is, then, an economy in which networks, information goods, intellectual property, etc. play a crucial role. On these aspects of the "information economy", the Hal Varian site ( is a good starting point.

3 Readers interested in non-convex economies may find the Centre de Recherche en Mathématiques, Statistique et Economie Mathématique (CERMSEM) site ( useful as a starting point.

4 Thereby bringing about the "euthanasia of the rentier", advocated by Keynes.

5 The differences which exist between copyright and the French "authors’ rights" regulation will not be debated here. In what follows, the general term “copyright” will be used to denote all legal instruments which aim to create property rights on information and to protect content (software, documents, films, etc.) by means of restrictions on access or bans on copying.

6 Economic models on the protection of intellectual property deal with the initial fixed cost of production and with spillovers: the quality of the information produced depends greatly on the information available. Temporary property rights in information (justified by the incentives given to potential authors) must be reduced as the initial cost falls and spillover grows. The Internet alters this balance: incentives become less necessary and spillovers greater. On the subject of the innovation economy and intellectual property, see, for example, No. 49/50 of the Annales d'économie et de statistique (1998).

7 This link between content and medium could be technically reestablished, by marking the content; these techniques are currently being developed. The future of such techniques is linked to that of copyright.

8 See Note 16 on one-to-one marketing as applied to the Internet.

9 On the subject of intermediation, see, in particular: "L'Intermédiation électronique" Laurent Gille, Philippe Mathonnet, SIRIUS, for the roneo’d accounts of the Commissariat Général du Plan et de la Mission pour les services du Ministère des Entreprises, May 1994, 74 pages (

10 The capacity to invent new products and to rapidly incorporate technical innovation is also the principal virtue of free markets. On this subject, see: Friedrich HAYEK (1978), ``New Studies in Philosophy, Politics, Economics and the History of Ideas'', Routledge and Kegan, London ; and Israel KIRZNER (1985), ``Discovery and the Capitalist Process'', The University of Chicago Press, Chicago.

11 It is, of course, possible to conduct an analysis of this type for all goods and services. However, when the production of goods is not subject to marked economies of scale, the function C1 depends on N (and very little on P), hence, the displacement of value towards the generation of demand does not essentially modify the form of the overall cost function. The Internet will be a privileged means of creating a customer base for all goods and services, but the results will be more substantial in the case of information goods (which, moreover, can be exchanged on line).

12 It will be noted that the function C1(P) may or may not be subject to economies of scale (and the empirical data regarding movies and T.V. programs tend to demonstrate that they are produced with constant returns). The essential point is that the function C1 depends on P, target audience, and not on N, actual audience. Irrespective of the anticipated audience, the cost of a subsequent marginal customer does not cause a variation in C1.

13 The cost C1(P) of producing the content may even become zero and play no further role in the cost function. This is the case, for example, with a work which has entered the public domain and which is being brought to people’s attention. The cost is then reduced either to C2(N) + C3(N) (bookshop publication of a forgotten xviii century text), or only to C3(N) (access to a Web site containing this text - the cost consists in directing the N consumers towards the site in question.)

14 The Falque-Pierrotin report (Internet et les réseaux numériques, Documentation française 1998) therefore advocates the setting-up of a "interministerial unit to combat high-tech crime” ( /francais/ textesref/ rapce98/ accueil.htm).

15 See, for example, the Electronic Frontier Foundation site (

16 One-to-one marketing is defined as follows in an advertisement for software offering this service on the Internet: “When connected to the server, the user can build up the host web page on the basis of his or her special interests. The same configuration will come up the next time he or she makes a connection. However, advertising will also be adapted to the user’s tastes and specific goods or services may be offered. This is the personalization of the commercial approach. All these functions may be summarised as follows: reception, incentive, persuasion, establishment of loyalty and transaction.”

17 On electronic commerce, see the report by the working group chaired by Mr Francis Lorentz, "Commerce électronique : Une nouvelle donne pour les consommateurs, les entreprises, les citoyens et les pouvoirs publics" (; see also: Daniel Kaplan, "La rentabilité du commerce électronique", which appeared in "Banque et Stratégie", February 1998 ( and also Laurent Gille, (Sirius, France) "Electronic Transactions: Facts and Trends" OECD Workshops on the Economics of the Information Society, Istanbul, December 14 and 15, 1995 (

18 For example, Amazon does not sell French books in France, but this company has a French customer base which buys books written in English. Moreover, Amazon inserts CD into its catalogue, a product for which the language barrier does not apply.

19 For a Parisian wishing to order a take-away meal, it may be advantageous to use a company based in Australia. This company could use a US database. Finally, the demand is linked up with the relevant supplier: the pizzeria on the street corner. In this extreme example, the Australian company will have carried out those phases where a major proportion of the transaction’s value is concentrated, namely converting the need for a meal into a demand for a specific pizza and arranging for the actual delivery of the pizza.

20 On 1 July 1997, the Clinton administration published the "Global Framework for Electronic Commerce" report, which recommends that commercial transactions on the Internet should not be subject to customs duties or to new taxes. The following extract gives an idea of the philosophy of the text: “For over 50 years, nations have negotiated tariff reductions because they have recognized that the economies and citizens of all nations benefit from freer trade. Given this recognition, and because the Internet is truly a global medium, it makes little sense to introduce tariffs on goods and services delivered over the Internet. Further, the Internet lacks the clear and fixed geographic lines of transit that historically have characterized the physical trade of goods. Thus, while it remains possible to administer tariffs for products ordered over the Internet but ultimately delivered via surface or air transport, the structure of the Internet makes it difficult to do so when the product or service is delivered electronically. Nevertheless, many nations are looking for new sources of revenue, and may seek to levy tariffs on global electronic commerce. Therefore, the United States will advocate in the World Trade Organization (WTO) and other appropriate international fora that the Internet be declared a tariff-free environment whenever it is used to deliver products or services. This principle should be established quickly before nations impose tariffs and before vested interests form to protect those tariffs. In addition, the United States believes that no new taxes should be imposed on Internet commerce. The taxation of commerce conducted over the Internet should be consistent with the established principles of international taxation, should avoid inconsistent national tax jurisdictions and double taxation, and should be simple to administer and easy to understand.” The text of the report is available at the following address:

21 The reader interested in cookies may refer to the following site: /articles/mayer/mayer.htm, where the following report may be found: The Internet and Privacy Legislation : Cookies for a Treat ? by Viktor Mayer-Schönberger. The following definition is taken from that text: “Cookies are pieces of information generated by a Web server and stored in the user's computer, ready for future access. Cookies are embedded in the HTML information flowing back and forth between the user's computer and the servers. Cookies were implemented to allow user-side customization of Web information. For example, cookies are used to personalize Web search engines, to allow users to participate in WWW-wide contests (but only once!), and to store shopping lists of items a user has selected while browsing through a virtual shopping mall. Essentially, cookies make use of user-specific information transmitted by the Web server onto the user's computer so that the information might be available for later access by itself or other servers. In most cases, not only does the storage of personal information into a cookie go unnoticed, so does access to it. Web servers automatically gain access to relevant cookies whenever the user establishes a connection to them, usually in the form of Web requests. Cookies are based on a two-stage process. First the cookie is stored in the user's computer without her consent or knowledge. For example, with customizable Web search engines like My Yahoo!, a user selects categories of interest from the Web page. The Web server then creates a specific cookie, which is essentially a tagged string of text containing the user's preferences, and it transmits this cookie to the user's computer. The user's Web browser, if cookie-savvy, receives the cookie and stores it in a special file called a cookie list. This happens without any notification or user consent. As a result, personal information (in this case the user's category preferences) is formatted by the Web server, transmitted, and saved by the user's computer. During the second stage, the cookie is clandestinely and automatically transferred from the user's machine to a Web server. Whenever a user directs her Web browser to display a certain Web page from the server, the browser will, without the user's knowledge, transmit the cookie containing personal information to the Web server.”

22 This is Coase’s intuition ("The Nature of the Firm'', Economica, 4, [1937]) developed by the theory of transaction costs and Williamson’s analyses ("Markets and Hierarchies : Analysis and Antitrust Implications'', New York, Free Press [1975]).

23 On the evolution of firms in an information economy, see, for example: François Bar, "Intelligent Manufacturing in the Global Information Economy", in The Transition to a Global Economy: Challenges for United States and the World, W. Drake ed., 20th Century Fund, NY, 1995. (

24 Benchmark procedures are a current example of this type of cooperation between competitors.

25 On the subject of portals and their current evolution, see the Business Week file: "The Battle of the Portals" at the following address:

26 Wanadoo is a special case: the free hosting is reserved for its subscribers, who do not have to accept advertisement (banners).

27 Such as ICQ (instant messaging program) developed by Mirabilis and recently purchased by AOL.

28 On the subject of the protection of intellectual property, see (in French): “Brevet, Protection and, Diffusion des Connaissances: une Relecture Néo-institutionnelle des Propriétés de la Règle de Droit”, Eric Brousseau and C. Bessy, Revue d'Economie Industrielle, Numéro spécial: “Economie Industrielle de la Science”, N° 79, 1er tri. 1997, pp. 233-254 (; Pamela Samuelson’s site ( is a useful starting point on the Web for intellectual-property issues (intellectual property in the information age).

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The Internet: a new information economy?

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