Computer Mediated Transactions

Innovation and Economic Growth and Networks, the Internet, and Cloud Computing

Article Snapshot


Hal R. Varian


UC Berkeley School of Information, Lecture, 2010.


This paper talks about how computers and the Internet have changed the business world.

Policy Relevance

Computer and the Internet help businesses lower costs of many functions by helping them use and share data to learn, experiment, and work together.

Main Points

  • “Combinatorial innovation” happens when the parts of a new technology can be combined by different inventors in countless ways. Such inventions spur intense periods of innovation.
    • Examples include standardarized mechanical parts in the 1800s, the interntal combustion engine, and the Internet.

  • The Internet spurs innovation because it uses bits of information as building material, which cannot run out, and because innovation online is not confined to one geographic area.

  • Buying and selling or working online involves computer mediated transactions. The use of computers makes four functions easier:
    • Forming new types of contracts.
    • Acquiring data and analyzing it.
    • Running experiments.
    • Personalization and customization.

  • What contracts could do is limited to what is enforceable. Computers help contracts do more.
    • Internet advertising contracts funded by auctions are a new type of business model. 
    • Car rental firms ask everyone to follow the speed limit, but could not enforce this until they could add computer to track the car’s speed. This benefits everyone.

  • Data is used by airlines and other firms to design new types of services and pricing structures.

  • Google and other firms can easily test how consumers respond to different versions of their services.

  • Work relationships are also changed by computers and cloud computing especially.
    • Many workers can collaborate on a single document, changing the nature of knowledge work.
    • Technology “platforms” lower the costs of launching new services.
  • o Even tiny firms can be multi-national, “micro-multinationals.”

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