Austan Goolsbee

Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry

The Internet has the potential to significantly reduce search costs by allowing consumers to engage in low-cost price comparisons online. This paper provides empirical evidence on the impact that the rise of Internet comparison shopping sites has had for the prices of life insurance in the 1990s. Using micro data on individual life insurance policies, the results indicate that, controlling for individual and policy characteristics, a 10 percent increase in the share of individuals in a group using the Internet reduces average insurance prices for the group by as much as 5 percent. Further evidence indicates that prices did not fall with rising Internet usage for insurance types that were not covered by the comparison websites, nor did they in the period before the insurance sites came online. The results suggest that growth of the Internet has reduced term life prices by 8 to 15 percent and increased consumer surplus by

Measuring Prices and Price Competition Online: Amazon.com and BarnesandNoble.com

115-215 million per year and perhaps more. The results also show that the initial introduction of the Internet search sites is initially associated with an increase in price dispersion within demographic groups, but as the share of people using the technology rises further, dispersion falls.

Coveting Thy Neighbor?s Manufacturing: The Dilemma of State Income Apportionment

Despite the interest in measuring price sensitivity of online consumers, most academic work on Internet commerce is hindered by a lack of data on quantity. In this paper we use publicly available data on the sales ranks of about 20,000 books to derive quantity proxies at the two leading online booksellers. Matching this information to prices, we can directly estimate the elasticities of demand facing both merchants as well as create a price index for online books. The results show significant price sensitivity at both merchants but demand at BarnesandNoble.com is much more price-elastic than is demand at Amazon.com. The data also allow us to estimate the magnitude of bias in the CPI due to the rise of Internet sales.

Evaluating the Costs and Benefits of Taxing Internet Commerce

This paper investigates the economic impact of the apportionment formulae used to divide corporate income taxes among the states. Most apportionment formulae, by including payroll, turn the state corporate income tax at least partially into a payroll tax. Using panel data from 1978 - 1994, the results show that this distortion has an important effect on state-level employment. For the average state, reducing the payroll weight from one-third to one-quarter increases manufacturing employment around 3% and the result is highly robust. The results also indicate that apportionment changes have important negative externalities on other states in that the effects of the apportionment formula on aggregate employment is zero. Every job gained within a state from an apportionment change is taken from another state. This externality suggests that the U.S. would be better off if the apportionment formula were set at a federal level. The paper also shows that because the payroll component of the tax is administered on top of the existing payroll tax, the deadweight loss from this component of state corporate income taxation may be significant, despite the low tax rates.

Valuing Consumer Products by the Time Spent Using Them: An Application to the Internet

Current tax law makes it difficult to enforce sales taxes on most Internet commerce and has generated considerable policy debate. In this paper we analyze the costs and benefits of enforcing such taxes including revenue losses, competition with retail, externalities, distribution, and compliance costs. The results suggest that the costs of not enforcing taxes are somewhat modest and will remain so for several years. At the same time, compliance costs and the benefits of nurturing the Internet diminish over time. When tax costs and benefits take this form, a moratorium provides a natural compromise.

Taxes, organizational form, and the deadweight loss of the corporate income tax

For some goods, the main cost of buying the product is not the price but rather the time it takes to use them. Only about 0.2% of consumer spending in the U.S., for example, went for Internet access in 2004 yet time use data indicates that people spend around 10% of their entire leisure time going online. For such goods, estimating price elasticities with expenditure data can be difficult, and, therefore, estimated welfare gains highly uncertain. We show that for time-intensive goods like the Internet, a simple model in which both expenditure and time contribute to consumption can be used to estimate the consumer gains from a good using just the data on time use and the opportunity cost of peoples time (i.e., the wage). The theory predicts that higher wage internet subscribers should spend less time online (for non-work reasons) and the degree to which that is true identifies the elasticity of demand. Based on expenditure and time use data and our elasticity estimate, we calculate that consumer surplus from the Internet may be around 2% of full-income, or several thousand dollars per user. This is an order of magnitude larger than what one obtains from a back-of-the-envelope calculation using data from expenditures.

The Value of Broadband and the Deadweight Loss of Taxing New Technology

By changing the relative gain to incorporation, corporate taxation can play an important role in a firms choice of organizational form. General equilibrium models have shown that substantial shifting of organizational form in response to tax rates implies a large deadweight loss of taxation. This paper estimates the impact of taxes on organizational form using data from 1900-1939. The results indicate that the effect of taxes is significant but small. A corporate rate increase of .10 raises the non-corporate share of capital .002-.03. The implied deadweight loss of the corporate income tax is around 5-10% of revenue.

Valuing Internet Retailers: Amazon and Barnes and Noble

Abstract With fixed costs of developing technology, taxes can generate large efficiency costs by slowing the rate of diffusion and these costs are not accounted for in conventional analyses. This paper illustrates the potential importance of this idea in the context of taxes on broadband Internet access at an early stage of its existence by combining data on individual demand by area with data on supplier entry into those markets. Applying a tax to broadband in 1998 would have reduced the quantity and generated a large deadweight loss in the conventional model but when the analysis accounts for the fixed costs of entering new markets, taxes lead to delayed entry in several markets. In these places, the lost consumer surplus is additional deadweight loss and it more than doubles the true efficiency costs from taxation. The conventional model also dramatically understates the share of the tax burden borne by consumers.

Does Government R&D Policy Mainly Benefit Scientists and Engineers?

Many Internet retailers must raise margins in the future if they are to survive. This raises the important issues of whether they will be able to raise margins as well as how valuation estimates made today should evaluate projected changes to margins in the future. In this paper, we describe retail strategies of pricing for market share in growing markets and show how measures of the price elasticity of demand facing retailers in the current year can be combined with standard accounting variables to inform calculations about future margins. Our analysis suggests that the capital market projects greater future margin improvements for Amazon.com than for BN.com and that this may be due to Amazon benefiting from network effects.