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

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)

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.

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