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Lessons About Markets from the
Internet
Glenn Ellison and Sara Fisher Ellison
Many of us have grown used to, tired of, and finally downright skeptical of
claims of the transformative powers of the Internet. It was to usher in
the New Economy, but we seem mostly to have the Old. It would
transform retail, but Toys ?R' Us has outlasted EToys. Frictionless commerce would
be the norm, but plenty of friction still exists.
The Internet was also claimed to require a whole new economics with all new
laws. While this, too, was very far from the truth?existing theories have mostly
done quite well?the Internet has had a substantial effect on economic thought. In
this paper, we discuss some ways in which the Internet has affected how economists
think about markets.
That the Internet has affected economic thought is perhaps surprising. Some
economic events, like the Industrial Revolution and the inflation of the mid-1970s
and early 1980s, have had a major impact on the way economics is done. But other
major events, like the development of the interstate highway system and the 1987
stock market crash, seem not to have made much of a difference. For this reason,
we begin in the next section with a brief discussion of what about the Internet
seems to be making it important to economic research.
We then turn to our main task and discuss two specific topics that received a
lot of attention in the popular press and that have been viewed differently by
y Glenn Ellison is Professor of Economics and Sara Fisher Ellison is Senior Lecturer in
Economics, both at the Massachusetts Institute of Technology, Cambridge, Massachusetts. The
paper was written while the a ...