Humanizing the Digital Economy by Victor Glass

Author:Victor Glass
Language: eng
Format: epub
ISBN: 9783031375071
Publisher: Springer Nature Switzerland

8.2 The Economist’s Perspective

Typically, an economist examines the structure of a market, the behavior of the participants, and the overall performance of the market. Here I look at the differences between the bricks-and-mortar economy and the online economy.

8.2.1 Product/Pricing Differences

The online economy is different than the bricks-and-mortar economy because many products are fluid – they are rearrangements of bit streams. In this milieu, the big payoffs are in introducing new services and opening new markets that can yield temporarily large profits. A big tech company will try to identify complementary products that will draw customers to its platform. It may set up gateways and rules to shape its internal markets to exact rents from its users. Data processed into useful information is the key competitive weapon to gain a competitive advantage and a major source of revenue from advertising and preferencing products.

Online pricing strategies do not conform to traditional economic theory of the firm. Many services are “free” in exchange for data that can be marketed. When prices are charged, they are sometimes levied on one side of the market. An example is free credit cards to consumers with vendors paying the credit card charge when it accepts credit card payment from its customers. Therefore, price/cost margins on one side of the market are a deceptive measure of market power. Traditional economics suggests that a company with market power would have higher margins than a similar firm with a similar cost structure in a competitive market. Extremely low or negative profit margins on the “free” side of a transaction may be mistaken for predatory pricing. Recent research on two-sided markets explains this pricing strategy by pointing out the price levels on each side of the market depend on the price sensitivity of demand for a particular product. In the case of credit cards, the customer for them is very sensitive to credit card fees; therefore, the credit card companies bury their charges in the price of goods sold.

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