4/25/2018 Net benefits - Free exchange

Free exchange
Net benefits
How to quantify the gains that the internet has brought to consumers

Print edition | Finance and economics Mar 9th 2013

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.

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Shane Greenstein of Northwestern

Latest stories
University and Ryan McDevitt of the
A study finds nearly half of jobs are vulnerable to
automation University of Rochester calculated the
GRAPHIC DETAIL
consumer surplus generated by the spread
Artists are rediscovering the oceans that surround of broadband access (which ought to
them
PROSPERO include the surplus generated by internet
Online porn will soon require age checks in
services, since that is why consumers pay
Britain for broadband). They did so by
BRITAIN
constructing a demand curve. Say that in
See more 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

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4/25/2018 Net benefits - Free exchange

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 (http://www.nber.org/papers/w14758) ," NBER
Working Paper #14758, 2009. “Measuring the Broadband Bonus in 20 OECD
Countries (http://www.oecd-ilibrary.org/science-and-technology/measuring-the-
broadband-bonus-in-thirty-oecd-countries_5k9bcwkg3hwf-en) ,”  OECD Digital
Economy Papers, No. 197, 2012. 

Household Demand for Broadband Internet Service: Final report to the

Broadband.gov Task Force Federal Communications Commission
(http://siepr.stanford.edu/system/files/shared/Household_demand_for_broadband.pdf)
. 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
(http://www.iabeurope.eu/media/95855/white_paper_consumers_driving_the_digital_uptake.pdf)
," study conducted by McKinsey & Co., commissioned and published by IAB

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4/25/2018 Net benefits - Free exchange

Europe, September 2010.

"A Day without a Search Engine: An Experimental Study of Online and Offline
Searches (http://yanchen.people.si.umich.edu/papers/VOS_2013_03.pdf) ," Yan
Chen, Grace YoungJoo Jeon, Yong-Mi Kim, 2012.

“Valuing Consumer Goods by the Time Spent Using Them: An Application to the
Internet (http://klenow.com/InternetSurplus.pdf) ,” 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

(http://cdn.oreillystatic.com/en/assets/1/event/57/The%20Economic%20Impact%20of%20Google%20Pre
," Presentation by Hal Varian, Chief Economist, Google

Economist.com/blogs/freeexchange (http://www.economist.com/blogs/freeexchange)

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