The New Economy in East Asia and the Pacific

By Peter Drysdale | Go to book overview

9

A force for market competition or market power?

Lewis Evans


BACKGROUND

The acquisition, analysis and use of information are fundamental to the operation of all markets. The 'new economy' is characterised by the high level of information processing, storage and distribution made possible by modern computer, electronics and fibre-optic technology, and by the rapid development of new technologies relevant to production and distribution in all sectors of the economy. As long ago as 145-87 BC, the importance of the 'invisible hand' and prices for conveying information for the organisation of economic activity were recognised. 1 In this chapter I shall review the principal themes of the economic analysis of information over the past 50 years and examine the impact of new-economy technology on the organisation of firms, the organisation of markets and competitive and cooperative relationships between firms.

The costs associated with the writing and monitoring of contracts and the organisation of markets depend on the cost of acquiring, analysing, developing and using information. 2 It follows that changes in the technology associated with the acquisition, storage and use of information may change transaction costs and thereby the relative costs of different economic institutions associated with economic activity. Coase (1937) emphasised that transactions costs are a critical element in determining the size and scope of a firm. Changes in transactions costs therefore affect assessments of whether an activity should be carried out within a firm or contracted out. Changes in transactions costs may also affect the operation and even the feasibility of organising markets. It is conceivable that the information technology of the new economy may so lower the costs of the organisation and participation in a market that new markets may be created. An obvious example is the emergence of competitive markets for activities that have until recently been considered to be natural monopolies best internalised within state-owned or regulated firms such as electricity.

Information is also central to cooperation between firms. Economists have long recognised that cooperation between firms may be efficient (for example, when joint ventures reduce industry-wide costs for particular types of

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