Handbook on the Economics of the Internet
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Handbook on the Economics of the Internet

Edited by Johannes M. Bauer and Michael Latzer

As the single most important general purpose technology of recent times, the Internet is transforming the organization, competitive structure and business models of the private, the public and non-profit sectors. In 27 original chapters, leading authors discuss theoretical and applied frameworks for the study of the economics of the Internet and its unique economics as a global information and communications infrastructure. They also examine the effects of the Internet on economic transactions (including social production, advertising, innovation, and intellectual property rights), the economics and management of Internet-based industries (including search, news, entertainment, culture, and virtual worlds), and the effects of the Internet on the economy at large.
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Chapter 3: The Internet as a complex layered system

Stephen J. Schultze and Richard S. Whitt


Mainstream discussions of Internet economics often rely on assumptions that were already seriously in doubt by the middle of the twentieth century. As it turns out, the rise of new economic thinking, along with new technology platforms culminating in the Internet, directly challenge many of those chief assumptions. In this chapter, we examine two features of the Internet – that it is a ‘complex adaptive system’, and that it is a layered, end-to-end platform – and we describe the effect of these features on our understanding of the economics of this unique network. We begin by describing some of the principles of neoclassical economics, and suggest ways in which it fails to fully capture the Internet’s dynamics and growth. We then outline the wave of new economic thinking referred to as ‘complexity economics’, and discuss how it helps to explain why highly networked systems often experience explosive growth. We show that the Internet can properly be understood as a complex adaptive system that also possesses a layered, end-to-end architecture – making it exceptionally well suited to promoting cascades of innovation.

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