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Ecommerce company pricing

From Inframarginal Versus Marginal Analysis of Networking Decisions and e-Commerce
Yew-Kwang Ng

The inframarginal analysis of impersonal networking decision can also be extended to explain the unusually high P/E ratio of many e-commerce companies. If positive network effects of e-commerce can be created by founding of many e-commerce companies, but services provided by these companies are not easy to directly price, then the merger of e-commerce companies and other companies which sell tangible goods can indirectly price intangible e-commerce services via implicit bundling in e-commerce. The story about bundling between automobiles and internet purchase services is an example. Other examples include the merger of the AOL and Warner Brothers, which bundles intangible services of the AOL with tangible goods provided by Warner Brothers, and Amazon.com which bundles intangible e-commerce with tangible hard copies of books. Hence, some e-commerce companies can have unusually high P/E ratio since the market expects that such companies may be merged or bought by other companies selling tangible goods at quite high share prices if they really create significant network effects of division of labour. This phenomenon is difficult to explain using marginal analysis in the existing literature of bundling and tying sale.

Working papers

Economic Reform and Constitutional Transition, by Jeffrey Sachs, Wing Thye Woo, and Xiaokai Yang

Endogenous Transaction Cost and Division of Labor, by Xiaokai Yang and Yiming Zhao

Trade Pattern and Economic Development when Endogenous and Exogenous Comparative Advantages Coexist, by Jeffrey Sachs, Xiaokai Yang, Dingsheng Zhang

Incomplete Contingent Labor Contract, Asymmetric Residual Rights and Authority, and the Theory of the the Firm, by Xiaokai Yang

The Crisis of Success and Feedback Quality in Managing Economic Crisis, by Xiaokai Yang

in the Model of Monopolistic Competition by Jeffrey Sachs, Xiaokai Yang, Dingsheng Zhang

Irrelevance of Inequality in Income to Economic Development, by Xiaokai Yang and Dingsheng Zhang

PhD Dissertations

PhD Dissertations

Meng-Chun Liu: Two approaches to trade and import protection (Chapters 0, 1, 2, 3, 4, 5)

Yongshen Zhang: Irrelevance of the Size of the Firm: Theory and Evidence (Chapter 0, 1, 2, 3, 4, 5, 6, 7,

Dingshen Zhang: Economic Development, Trade Pattern and Income Distribution (dissertation)

Books

DEVELOPMENT ECONOMICS : Inframarginal Versus Marginal Analyses
by Jeffrey Sachs and Xiaokai Yang, Blackwell, 2000 (Assessors Reports, Preface, Table of Contents and Literature Reference)

ECONOMICS: New Classical Versus Neoclassical Analysis, by Xiaokai Yang, Blackwell, 2000 (Table of Contents, First Chapter, and Literature Reference)

Economics, ecommerce

Also, internet virus and e-commerce fraud generate huge loses to world economy. Use of e-currency may create more opportunity for easy theft, just like monitarisation of commerce created more opportunity for pick-pocket in the past two centuries. All of the new phenomena call for institutional innovation and new policies that cannot be sorted out in the absence of government actions. Should the government institute a licensee system for e-commerce and an internet police system to address the new phenomena of e-commerce and internet economy?

Recent many economic theories and models are developed to investigate impersonal networking decisions and strategic networking decisions. Inframarginal analysis (total cost-benefit analysis across corner solutions in addition to marginal analysis of each corner solution) is a feature of the literature. The inframarginal analysis of networking decisions is much more powerful than conventional marginal analysis for explaining e-commerce phenomena.

Communication

Increasing income share of communication cost. The cost to delete useless message increases as communication efficiency increases. This is a typical network phenomenon: as communication efficiency increases, search scope enlarges, and income share of cost for deleting information that is not finally used increases. Another example of this phenomenon is that the city that upgrades transportation and communication infrastructure most rapidly has the most serious traffic jum. This network development phenomenon of increasing income share of transaction cost might be efficient as long as positive network effect of expanding network on aggregate productivity outweighs increasing transaction and communication costs.
*   As the reliability of each communication connection efficiency increases, the efficient reliability of the whole network decreases. In other words, aggregate risk of coordination failure of an increasingly larger network of e-commerce increases. Many news on devastating impacts of internet virus and paralysis of the whole network caused by paralysis of a link in the network provide evidences for this phenomenon.

Ecommerce

*   High P/E ratio of e-commerce and internet companies (300 or even higher) is out of proportion of any wild expectation. In particular, such high P/E ratio is usually associated with negative and declining profit of e-commerce companies due to the tendency of free provision of increasingly more e-commerce services. What is economic mechanism of this phenomenon that is inconsistent with the existing economic wisdom.
*
*    Due to efficient increases in transaction costs (including the increases in risk for coordination failure and in the tangible amount of resources allocated to deleting unwanted message), many new economic issues become the focus of social debate and policy making. For instance, development of internet makes more difficult for employers to monitor employees. Many employers complain that internet generates a great deal of lose to them since employees now spend most of working time surfing on internet for company business unrelated affairs. Some software is developed for employers monitoring employees’ use of internet. Some employees take the matter to the court to claim that their privacy is infringed upon. Some employees have won the litigation. Will the size of the firm decrease due to more disintegration, outsourcing, down-sizing and less employment within the firm? If the employers win the case, will a larger market for software of monitoring the use of internet by employees emerge? Another heating debate is about reforms of the patent system. In 1999, more than two thousand internet related patents are registered. Somebodies propose to shorten length of patent protection of an e-commerce related invention and to speed up patent approval process.

Neoclassical economics

The core of classical mainstream economics represented by William Petty and Adam Smith was about the development implications of division of labour. Although classical economists did not use the term of network effects, Smith did appreciate the nature of network effects of benefits of division of labour and specialization. He argued that the division of labour is limited by the extent of the market. In terms of modern economics, this Smith theorem implies that individuals’ decisions to choose their levels of specialization are determined by the benefits of division of labour, which are dependent on the number of participants in the network of division of labour (the extent of the market). Allyn Young (1928) spelt this out in the Young theorem that not only is the division of labour dependent upon the extent of the market, but the extent of the market is also dependent on the level of division of labour. This circular causation is a common feature of network effects, just like the circular causation that the use value of a telephone set is dependent on the number of telephone sets in use, and also the number of telephone sets in use is dependent on the use value of each telephone set.

But when Alfred Marshall formalized neoclassical economics within a mathematical framework at the end of the 19th century, he assumed the dichotomy between pure consumers’ decisions and firms’ decisions to avoid the inframarginal analysis of corner solutions. Within the neoclassical framework, each pure consumer buys all goods from the market and does not choose her level of self-sufficiency or its reciprocal: the level of specialization, which determines the size of her trade network. Hence, the focus of economics shifted from the inframarginal analysis of specialization and trade networking decisions to the marginal analysis of resource allocation for a given network size. By following this neoclassical framework, neoclassical development economics departs from the then mainstream classical economics. Hence, the inframarginal analysis of networking decisions lost the central position that it occupied in the classical mainstream economics.

From : Inframarginal Versus Marginal Analysis of Networking Decisions and e-Commerce
Yew-Kwang Ng

Business decisions

Real business decisions can be categorized in two classes: marginal decisions of resource allocation and inframarginal networking decisions. Here inframarginal analysis is the total cost-benefit analysis across corner solutions in addition to the marginal analysis of each corner solution. If the optimum value of a decision variable takes on its upper or lower bound (usually zero), the optimal decision is a corner solution. Formally, it relates to nonlinear programming, mixed integer programming, dynamic programming, the control theory, and other non-classical mathematical programming. In many cases, the inframarginal networking decision is much more important than the marginal decision. But since the marginal revolution, economists have focused their attention on the marginal analysis of resource allocation. The following example illustrates why the inframarginal decision might be more important than the marginal decision.

From: Inframarginal Versus Marginal Analysis of Networking Decisions and e-Commerce
by Yew-Kwang Ng