This chapter analyzes the rapid diffusion of the Internet across the United States over the past decade for both households and firms. We put the Internet’s diffusion into the context of economic diffusion theory where we consider costs and benefits on the demand and supply side. We also discuss several pictures of the Internet’s current physical presence using some of the main techniques for Internet measurement to date. We highlight different economic perspectives and explanations for the digital divide, that is, unequal availability and use of the Internet.

Policy is a series analyzing and discussing policy issues affecting the California economy.

As high-tech markets mature, replacement purchases inevitably become the dominant proportion of sales. Despite the clear importance of replacement, little work examines the separate roles of adoption and replacement. The analysis is complicated by the fact that a consumer’s decision to replace a product is dynamic because high-tech markets undergo both rapid improvements in quality and falling prices. To address these issues, I develop and estimate a dynamic consumer demand model that explicitly accounts for the replacement decision when consumers are uncertain about both future product price and quality. Using a unique data set from the PC processor industry, I show how to combine aggregate data on sales and product ownership to infer replacement behavior. The results reveal substantial variation in replacement behavior over time, and this heterogeneity provides an opportunity for managers to tailor their product introduction and pricing strategies to target the particular segment of consumers that is most likely to replace in the near future.

What is the relationship between market structure and innovative behavior in commercial computing and Internet markets? This broad question does not and cannot have a simple answer for at least two reasons. First, the core determinants of this relationship did not remain constant over several decades. Second, commercial

This paper uses consumer search data to explain search frictions in online markets, within the context of an equilibrium search model. I use a novel dataset of consumer online browsing and purchasing behavior, which tracks all consumer search prior to each transaction. Using observed search intensities from the online book industry, I estimate search cost distributions that allow for asymmetric consumer sampling. Research on consumer search often assumes a symmetric sampling rule for analytical convenience despite its lack of realism. Search behavior in the online book industry is quite limited: in only 25 percent of the transactions did consumers visit more than one bookstore’s website. The industry is characterized by a strong consumer preference for certain retailers. Accounting for unequal consumer sampling halves the search cost estimates from $1.8 to $0.9 per search in the online book industry. Analysis of time spent online suggests substitution between the time consumers spend searching and the relative opportunity cost of their time. Retired people, those with lower education levels, and minorities (with the exception of Hispanics) spent significantly more time searching for a book online. There is a negative relationship between income levels and time spent searching. I bene…ted from comments from Jean-Pierre Dubé, Jeremy Fox, Matt Gentzkow, Austan Goolsbee, Günter Hitsch, Steven Levitt, Jesse Shapiro, Chad Syverson, and seminar participants at the