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2013-03-12 10:33:12
How to quantify the gains that the internet has brought to consumers
Mar 9th 2013 |From the print edition
WHEN her two-year-old daughter was diagnosed with cancer in 1992, Judy Mollica
spent hours in a nearby medical library in south Florida, combing through
journals for information about her child s condition. Upon seeing an unfamiliar
term she would stop and hunt down its meaning elsewhere in the library. It was,
she says, like walking in the dark . Her daughter recovered but in 2005 was
diagnosed with a different form of cancer. This time, Ms Mollica was able to
stay by her side. She could read articles online, instantly look up medical and
scientific terms on Wikipedia, and then follow footnotes to new sources. She
could converse with her daughter s specialists like a fellow doctor. Wikipedia,
she says, not only saved her time but gave her a greater sense of control. You
can t put a price on that.
Measuring the economic impact of all the ways the internet has changed people s
lives is devilishly difficult because so much of it has no price. It is easier
to quantify the losses Wikipedia has inflicted on encyclopedia publishers than
the benefits it has generated for users like Ms Mollica. This problem is an old
one in economics. GDP measures monetary transactions, not welfare. Consider
someone who would pay $50 for the latest Harry Potter novel but only has to pay
$20. The $30 difference represents a non-monetary benefit called consumer
surplus . The amount of internet activity that actually shows up in GDP Google
s ad sales, for example significantly understates its contribution to welfare
by excluding the consumer surplus that accrues to Google s users. The hard
question to answer is by how much.
Shane Greenstein of Northwestern University and Ryan McDevitt of the University
of Rochester calculated the consumer surplus generated by the spread of
broadband access (which ought to include the surplus generated by internet
services, since that is why consumers pay for broadband). They did so by
constructing a demand curve. Say that in 1999 a person pays $20 a month for
internet access. By 2006 the spread of broadband has lowered the real price to
$17. That subscriber now enjoys consumer surplus of $3 per year, even as the
lower price lures more subscribers. The authors reckon that by 2006 broadband
was generating $39 billion in revenue and $5 billion-$7 billion in consumer
surplus a year. Based on its share of online viewing, Mr Greenstein thinks
Wikipedia accounted for up to $50m of that surplus.
Such numbers probably understate things. The authors calculations assume
internet access meant the same thing in 2006 as it did in 1999. But the advent
of new services such as Google and Facebook meant internet access in 2006 was
worth much more than in 1999. So the surplus would have been bigger, too.
More important, consumers may not incorporate the value of free internet
services when deciding what to pay for internet access. Another approach is
simply to ask consumers what they would pay if they had to. In a study
commissioned by IAB Europe, a web-advertising industry group, McKinsey, a
consultancy, asked 3,360 consumers in six countries what they would pay for 16
internet services that are now largely financed by ads. On average, households
would pay 38 ($50) a month each for services they now get free. After
subtracting the costs associated with intrusive ads and forgone privacy,
McKinsey reckoned free ad-supported internet services generated 32 billion of
consumer surplus in America and 69 billion in Europe. E-mail accounted for 16%
of the total surplus across America and Europe, search 15% and social networks
11%.
Another way to infer consumer surplus is from the time saved using the
internet. In a paper partly funded by Google, Yan Chen, Grace YoungJoo Jeon and
Yong-Mi Kim, all of the University of Michigan, asked a team of researchers to
answer questions culled from web searches. The questions included teasers like:
In making cookies, does the use of butter or margarine affect the size of the
cookie? On average, it took participants seven minutes to answer the questions
using a search engine, and 22 minutes using the University of Michigan s
library. Hal Varian, Google s chief economist, then calculated that those
savings worked out to 3.75 minutes per day for the typical user. Assigning that
time a value of $22 per hour (the average wage in America), he reckons search
generates $500 of consumer surplus per user annually, or $65 billion-$150
billion nationally.
Twitter: the defence
Yet another technique is to assign a value to the leisure time spent on the
web. Erik Brynjolfsson and Joo Hee Oh of the Massachusetts Institute of
Technology note that between 2002 and 2011, the amount of leisure time
Americans spent on the internet rose from 3 to 5.8 hours per week. The authors
conclude that in so far as consumers must have valued their time on the
internet more than the alternatives, this increase must reflect a growing
consumer surplus from the internet, which they value at $564 billion in 2011,
or $2,600 per user. Had this growth in surplus been included in GDP, it would
have raised economic growth since 2002 by 0.39 percentage points on average.
These are impressive figures, but they also merit scepticism. Would consumers
really pay $2,600 for the internet? Shouldn t other free leisure activities,
such as watching television or heaven forbid playing with your children, have
just as much value? And in other ways the internet subtracts value: the
productivity destroyed by incessant checking of Twitter, the human interactions
replaced by e-mail. Ms Mollica says people in hospital waiting rooms used to
develop a camaraderie rooted in their shared experiences. But now everyone
stares into their phone because they re texting or e-mailing.
Sources
Publications by Shane Greenstein and Ryan McDevitt: "The Global Broadband
Bonus: Broadband Internet s Impact on Seven Countries," in The Linked World:
How ICT Is Transforming Societies, Cultures and Economies, published by the
Conference Board, 2011. "The Broadband Bonus: Accounting for Broadband
Internet's Impact on U.S. GDP," NBER Working Paper #14758, 2009. Measuring the
Broadband Bonus in 20 OECD Countries, OECD Digital Economy Papers, No. 197,
2012.
Household Demand for Broadband Internet Service: Final report to the
Broadband.gov Task Force Federal Communications Commission. Gregory Rosston,
Scott J. Savage, Donald M. Waldman, February, 2010.
"Consumers driving the digital uptake: The economic value of online
advertising-based services for consumers," study conducted by McKinsey & Co.,
commissioned and published by IAB Europe, September 2010.
"A Day without a Search Engine: An Experimental Study of Online and Offline
Searches," Yan Chen, Grace YoungJoo Jeon, Yong-Mi Kim, 2012.
Valuing Consumer Goods by the Time Spent Using Them: An Application to the
Internet, Austan Goolsbee and Peter Klenow, American Economic Review (Papers
and Proceedings), May 2006.
"The Attention Economy: Measuring the Value of Free Goods on the Internet,"
Erik Brynjolfsson, and JooHee Oh, July, 2012 (draft).
"Economic Value of Google," Presentation by Hal Varian, Chief Economist, Google