The diffusion of the Internet and Low Inflation in the Information Economy
Meijers, Huub (2001). The diffusion of the Internet and Low Inflation in the Information Economy. UNU-MERIT Research Memoranda. UNU-MERIT.
Sub-type Working paper Author Meijers, Huub Title The diffusion of the Internet and Low Inflation in the Information Economy Series Title UNU-MERIT Research Memoranda Volume/Issue No. 42 Publication Date 2001 Publisher UNU-MERIT Language eng Abstract The adherents of the so-called 'New Economy' claim that we are entering a new era with high output growth, low unemployment and low inflation. ICT investments in general and the increased use of the Internet play an important role in this claim. However, the theoretical underpinning of this claim is still missing and the purpose of this paper is to contribute to the discussion around the increased use of the Internet and the low inflation experience. This paper presents the diffusion of the Internet as a cost saving technology in a model with network effects and dynamic market structures. The latter two result in an endogenous diffusion process of the use of the Internet for business-to-business commerce. However, there is also some feedback from the increased adoption of the Internet. Diffusion also affects the market structure and therefore the gains of the efficiency improvements obtained by doing business via the Internet. The combination of the diffusion of the Internet, the characteristics of this network and the dynamics of the markets can explain variation in the mark-up on production costs and the dynamics in the mark-up is found to explain at least a part of the low inflation experience. However, the model also predicts that the inflation suppressing effect of the increased use of the Internet eventually will cease and that inflation will increase in the longer run. The paper adds two new elements to the existing literature. First, it describes a model that combines network effects with changes in market structures to explain the diffusion of a cost reducing technology, i.e. the Internet. Second, it uses this model to explain the current low-inflation experience. Copyright Year 2001 Copyright type All rights reserved
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