Urban Economics

Econ 350

Urban/Regional Economics

Short Essay

Review of a Journal Article

Journal of Urban Economics, (56) 2004 1-24

Geography and the Internet:

Is the Internet a substitute or a complement for cities?

Todd Sinai and Joel Waldfogel

9th of May 2005

Abstract

This paper has provided with an interesting point to begin analysis. Communications technology has always been of interest to the urban economist. The internet has new significance as a method of commerce and looks set to aid in the further growth of the city or could spell the cities end by replacing a cities role of efficiently supplying goods. Throughout this essay I have sought to explain this paper in lay person's terms as well as demonstrate the papers place in the economic literature. Also I have used New Zealand example and instances allowing the audience to feel included within the essay.

Introduction

Communications and the future of the City have always been viewed by various academics as substitutes or complements. The invention of the telephone and the popularity of mail order products have all had there effect on the city however the development of the internet as a means of commerce, communications and market place has provided for a focus Sinai and Waldfogel's latest paper. There paper outlines weather the internet is a complement or a substitute for the modern city.

Outline

There paper includes three methods of reasoning derived from the same data sets. These topics include internet connection from a demand perspective, a measure local orientate sites and racial and distance motives for internet connection.

If the internet is a substitute for the city then;

"When production entails fixed costs and preferences differ across individuals, the number of differentiated product options available locally will increase in the size of the market"

This implies that large markets lead to and increase in variety of goods which intern increases consumption often referred to a the "preference externality. Appling this externality to the internet should result in a wider variety of goods and a decreased dependency on local goods. Off course geographically specific goods are not included; the internet will not cause Dunedin consumers to purchase more bikini's and swim wear just because the internet has a wide variety of products.

The internet may also substitute for people of similar preferences locally. Like minded people determine the offline market however people isolated due to there location i.e. ethnic minorities are more like to find products which match there tastes online. Sinai and Waldfogel use African-Americans as a proxy for like-minded people for example; American professors in Dunedin are likely to find products which they prefer online rather than locally because Dunedin can not satisfy there unique preferences.

In comparison if the internet serves as a complement for cities then costs are substantially reduced. For example Boston personals allow for efficient meeting of people with similar tastes and preferences. If local content increases with larger markets this indicates the Internet as a complement improving efficiency.

Data

Sinai and Waldfogel both use four sources for there data.

* August 2000 Current Population Survey Computer and Internet Use Supplement

o 50,000 households however only 29,027 were in Metropolitan Statistical Areas (MSA's). This data was slightly skewed towards non-African-Americans and the better educated; 44% of the households had the internet, 13% were African-American and 30% had University qualifications.

* August 2000 Media Matrix data extract

o Including 16.5 million web visits in the month

* Wharton Virtual Test Market (WVTM)

o Survey of 20,000 Internet users

* 1997 Economic Census

Market Size vs. Local Component

If the internet is a complement for urban agglomeration then it would be expected that as the size of the cities population increases there would be more local internet content accessed by it residents.

This was a difficult for the researchers to define a site as "local". So indexation was used to measure the site in terms of access online from independent metropolitan statistical areas (MSA). The above formula allowed for indexation to occur.

LIi =Site Localness

Pij = Page Visits to site (i) from MSA (j)

HHj = Number of Households in MSA

i = Site

j = MSA

Indexation proved correct as popular national sites including cbs.com, ebay.com and google.com scored above two while local sites such as baltimoresun.com, uscfootball.com and siliconalleyjobs.com scored less than two.

This was a strong test which supported the finding that the internet is complementary to cities. For an increase of one million people to a MRS there were 48 more local sites established.

Demand for Internet Connection

African-Americans were used as proxy for consumers with different preferences from the population. This was supported by previous research which demonstrated African-American tend to prefer media and goods orientated towards there racial group.

Supporting this is the Urban Economic principle in which larger cities provide a greater variety of goods and services purely due to size. i.e. a full-time professional Opera company is found in Sydney not Dunedin due to population base. The internet can allow consumers to overcome this hurdle by providing isolated (in terms of distance and culture) consumers the ability to consumer various exotic goods.

Using