David R. Henderson  

Consumer Surplus from the Internet: Remember the Producers

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More Thoughts on Philanthropy... Finished Reading Pallotta...

Tyler Cowen challenges me to engage "with the academic literature" on consumer surplus from the Internet. Fair challenge.

First, before doing so, I'll point out that I found it a little strange that he referred critically to a post I wrote on it last week without mentioning that a large part of my post was meant to talk down the extremely high consumer surpluses that makers of a film found by asking people whether they would give up the Internet. As I wrote in that post,

I think this part [the part of the film in which young people say no way would they give up the internet for a million] is more of a tribute to people's innumeracy than it is an indicator of consumer surplus. There's huge consumer surplus from the Internet but the people interviewed seemed to give out numbers with little thought.

Tyler referred to the thought in the second sentence above, leaving out the first.

Indeed, in an e-mail discussion after my posts with one of Tyler's economist colleagues, I expressed my skepticism this way, "I think we should be skeptical of the idea that the young people, when given the actual opportunity, would say, 'No, please tear up that check for $1 million with my name on it and give me back my cell phone, iPad, Travelocity, etc.'"

Now to answering Tyler's challenge. The academic article that he referenced that I looked at most carefully was the one by Goolsbee and Klenow. It was difficult to tell from their study whether they were including only consumer surplus (CS) from using the Internet as entertainment or a broader version of consumer surplus from not having to buy a newspaper, not having to get on the phone to make airline reservations, etc. I think they were simply referring to the former and they got, as Tyler notes, CS equal to 2% of income. That's not huge, but it's substantial. So how do I get to my conclusion that the CS is huge, which, to me, means on the order of 10% of income?

First, I think they were referring to the narrow view of CS I laid out above. What does that leave out? Here's how one of Tyler's commenters, Scoop, put it (I've edited slightly):

Does anyone remember how hard it was to get information? How much time do Americans save by not sitting through 30 minute newscasts to hear the weather and not staying up till SportCenter to get scores? How many things do you look up each day that once would have required a trip to the library? The library! My Christmas shopping now takes me less than an hour, per year.

Lower prices. Are all of these folks who report that the Internet is worth like $5 a month to them too stupid to save several hundred dollars a month by finding bargains online? Even if they are, they still benefit from Internet pricing because it constrains what merchants can charge. What did you save on the last car you bought? How about your last trip?

Second, in that post of mine, I wrote:

Still, the question is a good one and I'll try to frame it more carefully:
How much would you have to be paid, not just for you to give up the internet, but for the internet to disappear? (Why do I distinguish between your giving it up and the whole thing being gone? Because, of course, as the video points out, you get huge consumer surplus from producers' use of the internet.)

Here's what I wrote (scroll down) in my review of Tyler's short e-book, The Great Stagnation, about the importance of the Internet:
But Cowen considers only a narrow range of things that the Internet has changed. He views the Internet mainly from the perspective of a direct consumer and hardly at all from the viewpoint of producers who use it as an input. He writes that you do not benefit from the Internet "automatically in the same way you do from a flush toilet or a paved road." Yes, you do. Virtually everyone in America does every time he pays a bill online, makes airline reservations and compares fares online, or buys goods from online companies that have used the Internet to cut costs in their production process. Cowen might dispute my first two examples on the grounds that people benefit only by choosing to use it -- but is that not also the case with paved roads and flush toilets?

By the way, I note a mistake in the above. He was right about paved roads. The Internet is like paved roads in the sense that we all gain even if we never use them because producers have lower costs of getting things delivered and that shows up in the lower prices we pay--aka CS.

So I can imagine doubling Goolsbee's and Klenow's 2% to 4% to reflect the broader version of CS that users get directly and then adding another 4% to reflect the lower cost of getting goods and services delivered to us even if we never use the Internet directly. That get's it to 8%. To me that's "huge."


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COMMENTS (5 to date)
Todd writes:

I'm pretty sure that even from a strict consumers perspective, if you'd be willing to give up the internet for $1M or less, you're not doing it [the internet] right.

Imagine that you're married & someone makes the offer & you think great, I'll take $1M & I'll just mooch off my wife or kids (who didn't take the deal and presumably still have their smartphones) and ask them to Google whenever I have a question I want answered. 1) They would probably get annoyed & 2) you might start feeling more dependent upon others than before you had the $1M. Over the course of a lifetime (or a marriage) I could easily imagine those costs exceeding $1M present value.

ThomasL writes:

I wouldn't. It would mean giving up my work, the way I have found most of the music, books, movies, artwork, and other items of interest I've accessed or purchased since 1995 -- down to the tea I am drinking at this moment, the teapot I steeped it in, and the cup I poured it in.

Now, I don't need to burn the books I've ordered from Amazon, but I'd effectively be burning all the ones I will purchase. For $1M? Not a chance.

Cheers.

ThomasL writes:

Also, don't forget to discount that million by the increased prices you'll pay, and the increased transaction costs.

Keeping with the example above. The cup I ordered cost $5.61 delivered to my door. To buy the cup locally at list price--what most places here sell this brand for--would have cost $9.00, plus the round trip in time and gas to get it. Conservatively call it $12.00.

So, $12.00 vs $5.61... Quite a discount rate to apply to that money. I think more generally it could be set at 30-40%.

People that use the Internet a lot know that, and they know that even the $1M itself would go a lot further with the Internet than without it.

ChrisA writes:

Like most people nowadays, I literally could not do my job without email and some internet access, the NPV of my future earnings greatly exceed $1m (even subtracting the earnings from a job that I could do without the internet), so I would have to decline the check to give up internet. But, given where this debate started (with Tylers stagnation-slower growth thesis for the median person) this is probably not that great a way of calculating the consumer surplus from the internet, since what applies to one individual doesn't necessarily apply to society as a whole. For true calculation of consumer surplus (or value of the internet beyond GDP effects) we should compare a world where no-one has internet versus our current world.

Various writes:

I agree with that. I was estimating 5% for myself directly and maybe another 5% for society as a whole, for a total of 10%.

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