The of E-Commerce and Networking Decisions Also by Yew-Kwang Ng:

WELFARE ECONOMICS: Towards a More Complete Analysis The Economics of E-Commerce and Networking Decisions Applications and Extensions of Inframarginal Analysis

Edited by

Yew-Kwang Ng, Heling Shi and Guang-Zhen Sun Department of Economics Australia Editorial matter and selection © Yew-Kwang Ng, Heling Shi and Guang-Zhen Shun 2003 Chapters 1 and 2 © Yew-Kwang Ng Remaining chapters © Palgrave Macmillan Ltd 2003 Softcover reprint of the hardcover 1st edition 2013 978-0-333-99932-5 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2003 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-349-43329-2 ISBN 978-1-4039-3837-4 (eBook) DOI 10.1057/9781403938374 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data The economics of e-commerce and networking decisions : applications and extensions of inframarginal analysis / edited by Yew-Kwang Ng, Heling Shi, and Guang-Zhen Sun. p. cm. Includes bibliographical references and index. 1. Electronic commerce. I. Title: Electronics of e-commerce and networking decisions. II. Ng, Yew-Kwang. III. Shi, Heling, 1965- IV. Sun, Guang-Zhen. HF5548.32.E25 2003 381’.1–dc21 2003053276

10987654321 12 11 10 09 08 07 06 05 04 03 Contents

Notes on the contributors vii Preface x 1 Introduction 1 Yew-Kwang Ng

Part I Keynote Speeches 9 2 Inframarginal Versus Marginal Analysis of Networking 11 Decisions and E-Commerce Yew-Kwang Ng 3 A Review of the Literature of Inframarginal Analysis of 24 Network of Division of Labour Xiaokai Yang

Part II E-Commerce 53 4 E-Commerce, Transaction Cost and the Network of Division 55 of Labour: a Business Perspective Heling Shi and Hayden Mathysen 5 An Equilibrium Model of Hierarchy 69 Xiaokai Yang 6 A General Equilibrium Model with Impersonal Networking 101 Decisions and Bundling Sales Ke Li 7 Legislation, Electronic Commerce and the Common Law: 134 the Growing Legislative Framework, How it Compares Internationally, and its Failings in Australia Andrew Field 8 E-Commerce in : Problems and Potential 151 John Wong and Wong Chee Kong

Part III Impersonal Networking and Endogenous 169 Specialization: Theory and Applications 9 Towards a Theory of Impersonal Networking Decisions 171 and Endogenous Structure of the Division of Labour Guang-Zhen Sun, Xiaokai Yang and Shuntian Yao

v vi Contents

10 Identification of Equilibrium Structures of Endogenous 195 Specialization: a Unified Approach Exemplified Guang-Zhen Sun 11 Transaction Efficiency, Division of Labour and Foreign 214 Direct Investment: a Unified Model Dexin Yang 12 The Division of Labour and the Allocation of Time 248 Monchi Lio

Part IV Transaction Costs and the Division of Labour: 265 Measurement and Empirical Analysis 13 An Indirect Approach to the Identification and Measurement 267 of Transaction Costs George Rivers 14 An Empirical Study on the Division of Labour and Economic 298 Structural Changes Monchi Lio and Meng-chun Liu 15 Endogenous Transaction Costs and Division of Labour 311 Xiaokai Yang and Yimin Zhao Index 328 Notes on the Contributors

Andrew Field is Lecturer in the Department of Business Law and Taxation at Monash University, Australia. In addition to conducting research into the developing legal framework of electronic commerce, his research inter- ests include public and private international law and commercial law generally.

Ke Li is Assistant Professor in Economics, St Joseph’s University, USA, and Associate Professor at Nihon University Japan. His main research interests are property rights system, economic organization, economics of state, new economy, and economics of specialization.

Monchi Lio is Assistant Professor at National Sun Yat-sen University; his PhD is from National Taiwan University. His research interests are eco- nomic organization and uncertainty, economic history and empirical studies on transaction infrastructure.

Meng-Chun Liu is Research Fellow at Chung-Hua Institution for Economic Research, Taiwan. His PhD is from Monash University. His research inter- ests are international trade, economic organization, economics of techno- logical change, and empirical studies on transaction infrastructure.

Hayden Mathysen is a PhD candidate in the Department of Economics, Monash University, Australia. His PhD and principal research interests are in the spheres of bounded rationality, focal points and experimental co- ordination games.

Yew-Kwang Ng graduated with a BCom from Nanyang University (Singapore) in 1966 and a PhD from Sydney University in 1971. he has been a fellow of the Academy of Social Sciences in Australia since 1980. he has published refereed papers in economics, biology, mathematics, philoso- phy, and psychology, and articles in the popular press. Books published include Welfare Economics (1979), Mesoeconomics: a Micro-Macro Analysis (1986), Social Welfare and Economic Policy (1990), Specialization and Economic Organization (1993 with X. Yang), Increasing Returns and Economics Analysis (1998, co-edited with K. J Arrow and X. Yang), Efficiency, Equality, and Public Policy: with a Case for Higher Public Spending (Macmillan, 2000), Welfare Economics: Towards a Complete Analysis (Macmillan, forthcoming). He has also published a Kungfu Novel in Chinese serialized in Nanyang Business Daily (Malaysia) and as a book The Unparalleled Mystery (1994).

vii viii Notes on the Contributors

George Rivers is a continuing lecturer in the Department of Economics at Monash University. His research interests relate to the theory of the firm, including mergers and acquisitions, downsizing and transaction costs. He is currently a candidate in the degree of Doctor of Philosophy, which is in the process of being finalized. He is the joint author of Rivers and Ward ‘Economics in the Business Environment’. He is also a director of the Master of Applied Economics and a member of the Faculty of Business and Economics Marketing Advisory Group. He has been involved with various consulting engagements including, most recently, cost–benefit work with the Department of Natural Resources and the Environment, The Victorian Qualifications Authority and The Royal Botanical Gardens.

Heling Shi is Senior Lecturer In Economics, Monash University. He has applied inframarginal economics in the areas of international trade and , economics growth, industrialization, e-commerce, eco- nomics of property rights and the international comparison of living standards.

Guang-Zhen Sun is Logan Fellow in Economics at Monash University and Assistant Professor of Economics, the University of Macau. His current research interests are microeconomic analysis of the division of labour and evolutionary economics.

Wong Chee Kong completed his Master’s degree at the Department of Economics, National University of Singapore. His research interests include the Chinese economy, the development of information technology and the Internet in China and the economics of network industry.

John Wong is Research Director of the East Asian Institute at the National University of Singapore. He was formerly Director of the Institute of East Asian Political Economy (1990–96). His research interests are on economics development of China, Asian NIEs and ASEAN economies, and other economic issues of East Asia. He has written more then ten books and published numerous articles and papers on China and other East Asian economies.

Dexin Yang is Associate Professor of Economics at Zhongnan University of Finance and Economics. His research interests are foreign direct investment and regional economic development.

Xiaokai Yang is Professor of Economics at Monash University. His 1993 book, Specialization and Economic Organization, with Yew-Kwang Ng, has been described by Ben-Ner, in Journal of Institutional and Theoretical Economics (1995, p. 571), ‘as a veritable technical and intellectual tour de Notes on the Contributors ix force’. Their new framework has spawned many research papers shedding new lights upon many economic issues.

Shuntian Yao is Associate Professor in Economics at Nanyang Business School, Nanyang Technological University of Singapore, and a Charter Member of the Game Theory Society. Yao’s main research interests are in Game Theory and , having published articles in the Journal of Economic Theory, the Economics Journal, and the Journal of Mathematical Economics and Games and Economic Behaviour. Yao is involved in the research projects on Inframarginal Analysis in the Yang–Ng frame- work, having made some contributions to the theoretical foundations.

Yimin Zhao obtained his PhD in Economics from Monash University. Dr Zhao is currently providing economics consulting services to multinational enterprises in China and heading up the transfer-pricing unit of KPMG Shanghai. He was a research fellow in Monash University, with particular research interests in the areas of economics of specialization and imperfect competition. Preface

This volume is a collection of selected revised papers, from the international conference on ‘The Economics of e-Commerce and Networking Decisions’ held at Monash University on 6–7 July 2001. The financial assistance to the conference of the following sponsors is gratefully acknowledged: Department of Economics – Faculty of Business and Economics, Monash University; Australian Research Council; Productivity Commission; and Law & Eco- nomics Consulting Group. During the conference, Professor Paul Milgrom from Stanford University and Professor Yew-Kwang Ng, as keynote speakers, reviewed features of recent e-commerce phenomena and the relationship between e-commerce phenomena and inframarginal analysis of impersonal networking decisions especially in light of the division of labour decision, developed mainly by associated with the Department of Economics, Monash University. Other participants (from Australia, New Zealand, USA, Japan, China Mainland, Hong Kong, Macau, Taiwan, and Singapore) presented their papers on various aspects of the economics of e-commerce and infra- marginal analysis of the network of division of labour. An interesting dialogue during the conference may be reported. Xiaokai Yang expressed his admiration of the high EQ (emotional quotient) of Yew- Kwang Ng. The latter expressed his surprise, saying ‘I always believe that I have very low EQ both in comparison to my IQ and in comparison to the EQ of my wife. My only possible explanation of your admiration must be that, while your IQ is higher than mine, your EQ may be even lower than mine!’ As it turned out, Xiaokai proved his low EQ (absolutely as well as relatively) during the conference by failing to notify the Pro Vice- Chancellor for research (who was invited to open the conference) of a change in the opening time (advanced by half an hour), making the Pro Vice-Chancellor too late (while punctual for the original scheduled time) to open the conference. While Xiaokai has climbed to the towering heights with his theoretical analysis of networks, he had, on that day at least, almost completely cut off one of the most important network links in practice. As an example of the low EQ of Kwang, the following true story may be told. He was visiting the Department of Economics, National University of Singapore (NUS) in the second half of 2002 when Professor X started his appointment there as the head of department. During a function of the graduate students, the two of them were sitting together and X mentioned to Kwang about the two ex-wives of X. A week or so later, while making the point on the importance of marriage to happiness during a seminar, Kwang

x Preface xi suddenly (without prior foreknowledge) said something like this: “Our head of department, who is sitting right there, has two ex-wives. He may be able to share his experience with us later.” Kwang immediately realized that the statements made might have been a mistake but comforted himself that X probably did not mind as he had volunteered the poten- tially sensitive information about himself to a new acquaintance in a fairly public place in the first place. Nevertheless, other participants of the seminar did not agree and had said privately (as Kwang later found out), “This will be the last time Yew-Kwang visits NUS!”, implying that X would be so angry as to never appoint Kwang as a visiting professor again. Two weeks or so later, during a dinner in the presence of other distinguished guests, probably trying to exemplify the frankness (if not naivety) of Kwang, X said to the whole group, “He even disclosed matters of my private life in front of the whole seminar audience!” Kwang then tried to explain to X the basis of his mistake saying, “As you mentioned to me your two ex-wives….”, thus disclosing the precise nature of the faux pax again in front of the distinguished guests! When Kwang apologized to X for his double mistakes the next day, X was rather gracious and asked him to forget about it. This is not the end of the story yet. Robert Owen, Professor of Economics at the University of Nantes, was also visiting the Department and told Kwang later, “I told X not to worry and explained that this may be a blessing in disguise, since the disclosure made known to all the graduate students (half of them being female) that X was available.” To which, Kwang replied, “I hope that Professor X will get a third wife from among one of the graduate students. Then I might be able to come back to visit NUS after all!” Another true story about Xiaokai may be told. Soon after the publication of Yang and Ng (Specialization and Economic Organization: a New Classical Microeconomic Framework, Amsterdam: North-Holland, 1993), Fischer Black (who would have shared a Nobel prize in economics had he not died earlier; also reputed to be one of a very few rich, if not the richest eco- nomist at the time) was impressed enough by the book (on his evaluation, see Black, Exploring General Equilibrium, Cambridge: MIT Press, 1995, pp. 255–6) to write Yang and Ng a letter. After the latter’s response, he emailed Xiaokai asking him some questions and then also asked Xiaokai whether any financial support was needed for our research. Xiaokai replied to the question and said that he would come back to the question of financial assistance later when he would be less busy. Many weeks passed. Before Xiaokai could email Black regarding support for research, Black passed away. Xiaokai could have been given a huge sum of research funding by just writing that email in time! Xiaokai Yang – a remarkable person? As one who, during the early stages of the , dared to challenge the Chinese communist authority even as a teenager (and was imprisoned for ten years for that; see xii Preface

Yang and McFadden Captive Spirits, New York: Oxford University Press, 1997), no doubt about it! (Yew-Kwang Ng is absolutely sure that he admires Xiaokai Yang for his courage here much more than Xiaokai’s admiration of Yew-Kwang’s EQ, despite the interpersonal comparison involved!) While this editorship is largely a joint product, Heling Shi is largely responsible for editing Section 2, while Guang-Zhen Sun for the other sec- tions, and Yew-Kwang Ng for the overall coordination and the writing of the preface and introduction. (See, we do not just analyse but also practice division of labour.) All the selected papers have been refereed and revised. While the editors have tried to improve the quality and presentation of the papers, remaining mistakes as well as merits rest principally with the authors of the respective papers. Finally, we wish to thank Roland Cheo for meticulously undertaking the final stage of editing and putting the volume into camera-ready form.