Economics of digitization

The economics of digitization is the field of economics that studies how digitization, digitalisation and digital transformation affects markets and how digital data can be used to study economics. Digitization is the process by which technology lowers the costs of storing, sharing, and analyzing data. This has changed how consumers behave, how industrial activity is organized, and how governments operate. The economics of digitization exists as a distinct field of economics for three reasons: it studies a world that is digital, exponential and combinatorial. First, new economic models are needed because digital goods have very low or even zero marginal costs unlike most traditional goods, thus many traditional assumptions no longer hold in a digitized world. Second, the rate of improvement of computers, networks and other engines of digitization, is exponential, as reflected by Moore's Law. Third, digital goods can easily be combined and recombined, increasing their value not only via networks and platforms, but also novel combinations. Each of these effects is important individually, but together they have synergies and constitute a distinct economic landscape.

Research in the economics of digitization touches on several fields of economics including industrial organization, labor economics, and intellectual property. Consequently, many of the contributions to the economics of digitization have also found an intellectual home in these fields. An underlying theme in much of the work in the field is that existing government regulation of copyright, security, and antitrust is inappropriate in the modern world. For example, information goods, such as news articles and movies, now have zero marginal costs of production and sharing. This has made the redistribution without permission common and has increased competition between providers of information goods. Research in the economics of digitization studies how policy should adapt in response to these changes.

The field is relatively new. The National Bureau of Economic Research created their first workshop on the Economics of Information Technology and Digitization in 2011, with sessions on digital advertising, digitization and productivity, and related topics.

The Internet is a multi-layered network which is operated by a variety of participants. The Internet has come to mean a combination of standards, networks, and web applications (such as streaming and file-sharing), among other components, that have accumulated around networking technology. The emergence of the Internet coincided with the growth of a new type of organizational structure, the standards committee. Standards committees are responsible for designing critical standards for the Internet such as TCP/IP, HTML, and CSS. These committees are composed of representatives from firms, academia, and non-profit organizations. Their goal is to make decisions that advance technology while retaining interoperability between Internet components. Economists are interested in how these organizational structures make decisions and whether those decisions are optimal.

The commercial supply of Internet access began when the National Science Foundation removed restrictions for using the Internet for commercial purposes. During the 90's internet access was provided by numerous regional and national Internet service providers (ISPs). However, by 2014, the provision of high-speed broadband access was consolidated. About 80% of Americans can only buy 25 Mbit/s from one provider and a majority only have a choice of two providers for 10 Mbit/s service. Economists are particularly interested by competition and network effects within this industry. Furthermore, the availability of broadband may affect other economic outcomes such as the relative wages of skilled and unskilled workers.

A key issue in the economics of digitization is the economic value of Internet-based services. The motivation for this question is two-fold. First, economists are interested in understanding digitization related policies such as network infrastructure investment and subsidies for Internet access. Second, economists want to measure the gains to consumers from the Internet. The revenues of Internet Service Providers provided one direct measure of the growth in the Internet economy. This is an important topic because many economists believe that traditional measures of economic growth, such as GDP, understate the true benefits of improving technology. The modern digital economy also tends to lead to reliance on inputs with zero price.

Digitization has coincided with the increased prominence of platforms and marketplaces that connect diverse agents in social and economic activity. A platform is defined by Bresnahan and Greenstein (1999) as "a reconfigurable base of compatible components on which users build applications". Platforms are most readily identified with their technical standards, i.e., engineering specifications for hardware and standards for software. The pricing and product strategies that platforms use differ from those of traditional firms because of the presence of network effects. Network effects arise within platforms because participation by one group affects the utility of another group. Many online platforms replicate identical process or algorithms at virtually no cost, allowing them to scale the network effect without encountering diminishing returns. Large scale network effects make the analysis of competition between platforms more complex than the analysis of competition between traditional firms. Much work in the economics of digitization studies the question of how these firms should operate and how they compete with each other. A particularly important issue is whether markets for online platforms have a tendency towards "winner-takes-all" competitive outcomes, and should be subject to antitrust actions.

Online platforms often drastically reduce transactions costs, especially in markets where the quality of a good or trading partner is uncertain. For example, eBay drastically increased the market for used consumer goods by offering a search engine, reputation system, and other services that make trade less risky. Other online marketplaces of this type include Airbnb for accommodations, Prosper for lending, and Odesk for labor. Economists are interested in quantifying the gains from these marketplaces and studying how they should be designed. For example, eBay, Odesk, and other marketplaces have adapted the use of auctions as a selling mechanisms. This has prompted a large literature on the comparative advantages of selling goods via auction versus using a fixed price.