Download 2.3: Digital Market Structure

Program:
Business Studies
Course Title: Digitalisation and New Market
Paradigms
Course Code: MAMA311
Total Credits:
1.5
Total lecture Hours: 7.5
Course Lecturer: Uwem Essia
COURSE OVERVIEW AND OUTLINE
Course Description
• The students are taught how digitalization is
changing the way business is done.
• The new market possibilities created in the digital
economy are explained.
• How the structure, conduct and performance of
firms are affected by digitalization is discussed.
• The new microeconomics of competition explained.
• Imperatives of the new economy for corporate and
macroeconomic policies are discussed.
COURSE OVERVIEW AND OUTLINE
Pedagogic Goal
• The students’ capacity to carry out marketing
activities in the new markets is improved.
Pedagogic Objectives
• The students understand how digitalization has
changed the way business is done.
• The students understand how marketing is affected
by the Internet.
• The student appreciates the implication of
digitalization for macroeconomic policies and
overall development programming.
COURSE OVERVIEW AND OUTLINE
Learning Objectives
• The students can differentiate the digital economy
from the ‘brick and mortar’ economy.
• The students can explain the paradigm shifts in
marketing occasioned by digitalization.
• The student is able to link changes in the digital
economy to macroeconomic and global
development.
COURSE OVERVIEW AND OUTLINE
Learning Outcomes
• The students are able to function better in the digital
economy.
• The students are able to undertake researches in digital
marketing related areas in line with global best
standards.
Course Outline
• Content
• Section 1: From Industrial to Digital Economy
• 1.1. New basic conditions
• 1.2. The positive loop effect of knowledge creation
• 1.3. The knowledge worker
• 1.4. The Internet as a converging force
• 1.5. Layers of the Internet Economy
COURSE OVERVIEW AND OUTLINE
Session 2: Structure-Conduct-Performance
2.1: Performance in the Digital Economy
2.2. Production and allocation efficiency
2.3: Digital Market Structure
2.3.1. Redefining industries and competing groups
2.3.2. Barriers of entry to online trading
2.3.3. Drop-out rate of business startups
2.3.4. Frictions in the electronic and conventional
2.3.5. Transparency of virtual markets.
2.3.6. Economies of enterprise size in the Internet world
2.3.7. Market structures in virtual markets
COURSE OVERVIEW AND OUTLINE
2.4. Conduct Of The Digital Economy
2.4.1. Competitive strategy in the digital economy
2.4.2. Money and payment
2.4.3. Innovation
Session 3: Pricing Behavior
Session 4: Behavior of Firms
4.1. Connectivity And Firm Behavior
4.2. Dis- and re-intermediation
Session 5: Product Strategy and Advertising
COURSE OVERVIEW AND OUTLINE
Session 6: Other Firm–level Characteristics
6.1. Company finance and the growth of firms
6.2. Legal tactics
6.3. Standards
Session 7: Macroeconomics of Spillovers
7.1. Role of Government
7.2. Need for Supranational moderation
Session 8: The Digital Economy and Economic
Growth
8.1. Digital divide and the catch up
8.2. Skill requirements
1: From Industrial to Digital Economy
1.1. New basic conditions
• Recent ICT explosion has moved world from the
‘brick and mortar’ industrial age to the digital era.
• The Internet has changed the basic conditions
significantly.
• It is still debated how productive the internet has
really been – the so-called ‘productivity paradox’.
• On the one hand, it is argued that ICT has positive
impact on productivity,.
• On the other hand, the re-organization necessitated
by ICT adoption creates a huge cost.
1: From Industrial to Digital Economy ..1
1.1. New basic conditions
• Moreover, it takes many years for the payoffs from
the IT revolution to manifest.
• But the Internet evolution has already created the
“information society”.
• And theories of the old economy that are based on
the traditional factors of production (land, capital,
labor) need re-examination.
• Nowadays, intellectual, creative, and innovative
capital (basically knowledge) drive development.
• The basis for comparative advantage has changed:
hence the paradigm shifts.
1: From Industrial to Digital Economy ..2
1.2. The positive loop effect of knowledge creation
• The first type of knowledge dominating the digital
society is imaginary or creative knowledge:
– Presentation skills is an example of imaginary skills.
– Team building is an example of creative knowledge.
• The second type of knowledge is practical
knowledge that is based on data and information.
– Mastery of algebra is practical knowledge – once
internalized the student can apply the new knowledge to
physics, chemistry or economics.
– This is necessary where knowledge is needed to obtain
and to use (adoption requirements) knowledge.
1: From Industrial to Digital Economy ..3
1.2. The positive loop effect of knowledge
creation
• The vast cyberspace warehouses data and its
network effect increases interactive data
exchange exponentially.
• This positive loop effect of knowledge creation
is highly accelerated.
• Computers have increased the ‘brain power’ of
humankind magnificently.
• So too are interconnectivity of computers and
people via the Internet.
1: From Industrial to Digital Economy ..4
1.2. The positive loop effect of knowledge creation
• The generation, processing and distribution of
knowledge and information drive productivity.
• All firms need ICT to be on the competitive
technological frontier.
• Thanks to the Internet, Knowledge is almost nonrival and non-excludable:
– Knowledge cannot be kept secret for any possible long
period;
– the new economy is characterized by uncontrollable
spillovers and externalities
• It is now important that experts conceptualize how
knowledge and information can best be modeled.
1: From Industrial to Digital Economy ..5
1.3. The knowledge worker
• The knowledge society requires a ‘knowledgeable
worker’ with up-to-date competencies.
• Workers need to renew their skills through “lifelong learning” and “on-the-job-training”.
• The Internet or virtual space is increasingly an
important part of human life.
• It is also the dominant medium to create, transmit
and share information and ideas.
• Nearly everyone is compelled to "think network",
and live through the liberalized sea of information
flow.
1: From Industrial to Digital Economy ..6
1.3. The knowledge worker
• However, many fear that the cyberspace may
someday collapse due to information overload.
• The volume and speed of flow of information has
been very high.
• Many now focus just on synthesizing information
already provided.
• Much less time is available for analyzing
coherences and creating new information.
1: From Industrial to Digital Economy ..7
1.4. The Internet as a converging force
• The Internet engulfs all aspects of economic,
political, social-cultural and moral life.
• Knowledge is converging. It is now more difficult
to separate professions and specialties.
• It not only loss of distance, but also loss of space.
knowledge knows no territorial boundaries.
• Individuals, firms, and countries are now under
immense pressure to be global players.
• Measures of performance for the industrial age
have become ill equipped for the new economy.
1: From Industrial to Digital Economy ..8
1.4. The Internet as a converging force
• This is particularly so because network or
global effect are difficult to contextualize and
measure.
• Network externalities exist because the utility
from being connected increases when more
persons are connected.
• Subscription to the network is more valuable
as the network is oversubscribed.
1: From Industrial to Digital Economy ..9
1.5. Layers of the Internet Economy
The Internet economy can be divided into four layers, namely;
Infrastructure Layer, Application Layer, Intermediary Layer, and
Commerce Layer
• Infrastructure Layer – players in this layer provide the hard
infrastructure e.g., backbone providers and Internet service
providers, and manufacturers.
• Application Layer – players in this layer build upon the
infrastructure provided. They include, Internet consultants, and
web/software developers, etc.
• Intermediary Layer – players in this layer facilitate the meeting
and interaction of buyers and sellers over the Internet. These
include: online travel agents and brokers, content aggregators,
portals/content providers and online advertising,
1: From Industrial to Digital Economy ..10
1.5. Layers of the Internet Economy
• Commerce Layer – players in this layer sell products
and services to consumers or businesses over the
Internet. These include e-tailers, manufacturers
selling online, airlines selling online tickets, and
online entertainment and professional services.
• Note that many companies are players at multiple
layers.
• For instance, Microsoft and IBM are important
players at the Internet infrastructure, applications,
and Internet commerce layers.
Review Questions
1. Explain how the IT revolution has created new
basic conditions.
2. Explain why imaginary skills, creative knowledge
and practical knowledge are relevant in the digital
economy.
3. The internet has rendered the knowledge nonrival and non-excludable. Discuss.
4. Do you agree with the view that the
“knowledgeable worker” needs to renew skills
through lifelong learning
5. In what ways is the internet a converging force?
Session 2: Structure-Conduct-Performance
2.1: Performance in the Digital Economy
• In the new economy, the frontiers for goods and services have
melted down to “digital- or non digital” goods.
• Digital goods can bypass transportation costs, and quite often
the wholesale and retail networks.
• They are non-rival, for example, most web users go online to
get news and information, and every big newspaper or
magazine, and TV stations have valid web addresses.
• Digitalized goods are pulled by the demand of the customer,
and pushed by the supplier.
• Digital products have high fixed cost and low marginal cost;
– For example, information is expensive to produce, but
cheap to reproduce.
2: Structure-Conduct-Performance ..1
2.1: Performance in the Digital Economy
• Digital goods are not generally governed by the
conventional economic notions of scarcity and increasing
marginal cost.
• The Internet is blurring traditional description of tradable
and non-tradable goods.
• It is now possible to trade more goods and services.
• Any activity that can be conducted via a screen and
telephone can be carried out anywhere in the world.
• Some goods, like food, may never become digitalized.
• Goods like software are very susceptible to digitalization
and hardly get distributed physically anymore.
2: Structure-conduct-performance ..2
2.2. Production and allocation efficiency
• Competitiveness of the virtual markets checks
misallocation of resources.
• Interactivity of Internet has eased adjustment of
prices.
• A modern capital market demonstrates how the
new economy can be efficient.
• The digital economy aligns demand to supply more
intimately.
• Markets and industries are getting destroyed and
created at an unprecedented speed.
2: Structure-Conduct-Performance .. 3
2.2. Production and allocation efficiency
• Today's businesses and consumers demand more
customized set of products and services.
• Firms in the same industry compete and at the
same time collaborate to develop knowledge.
• Digitalization encourages co-operational
relationship of firms in a value chain.
• The new economy defines the basic assumptions
and analytical tools.
• This has redefine what is meant by “good
performance”.
2: Structure-Conduct-Performance .. 4
2.3: Digital Market Structure
• The transition from ‘brick and mortar’ to the digital economy
raises a number of questions:
– What is the structure of industries and competing groups?
– Has barrier to entry changed with online trading?
– How is the drop-out rate of startups in the emerging
markets?
– Do electronic markets have less friction than conventional
markets?
– How transparency are virtual markets'?
– Does the firm size matter in the virtual market?
– Does the textbook model of perfect competition apply in
virtual markets?
2: Structure-Conduct-Performance .. 5
2.3: Digital Market Structure
2.3.1. Redefining industries and competing groups
• Openness of the virtual markets to customers has accelerated
competition.
• In considering ‘economies of scale’, the concern now is with
‘scope’ instead of ‘size’.
• Firms reduce cost with multiple products instead of producing
more of one product.
• The unit costs are lower when complementary products are
produced by a single firm.
• The synergy created from complementarities are the 'cross
product' and 'cross-learning effects'.
• In the old economy the focus of a firm was on maintaining and
improving the actual business.
2: Structure-Conduct-Performance .. 6
2.3: Digital Market Structure
2.3.1. Redefining industries and competing groups
• In the new economy the preoccupation is to continuously
initiate new, innovating businesses.
• The old firm focused on maintaining and improving the actual
business.
• But the new firm is to continuously initiating new, innovating,
businesses.
• The new economy is dominated by ‘unconditional consumer
focus’, and product individualization.
• This has redefined industries and competing groups.
• Measurement systems of the old economy are ill-equipped for
the digital economy.
2.3. Digital Market Structure
2.3.2. Barriers of entry to online trading
• The new economy has made entry and exit much
easier.
• Since no firm is able to control the value chain, new
firms are often set up virtually overnight.
• Outsourcing eases the entry of new business ideas
into a market niche (of a value chain).
• New ideas and enterprises often do not need need to
spend much on fixed cost spending.
• Marketing is eased by online ordering.
• The “death of distance” kills many market entry
inhibitions of spatial economics.
2.3. Digital Market Structure
2.3.2. Barriers of entry to online trading
• The worldwide-Web is cutting through many of the
distribution and market barriers.
• Local firms are increasingly gaining access to foreign
markets.
• This is extremely beneficial for small and mediumsized firms.
• Barriers of entry to global markets, especially in the
supply chain, procurement and outsourcing have
now almost vanished.
2.3: Digital Market Structure ..2
2.3.2. Barriers of entry to online trading
• The internet cuts through distribution and market
barriers that limits access to foreign markets.
• This is has been quite beneficial for small and
medium-sized firms.
• However, the network effects and economies of
scope favor the established firms.
• This has raised some entry barriers for the ecommerce newcomers.
2.3: Digital Market Structure ..3
2.3.3. Drop-out rate of business startups
• While entry may be easy, growth and survival of
businesses constitute the major challenge.
• Barriers to entry may be low, but the issues is
whether it makes sense to enter in the first place.
• The key ingredient for success is creating the
“economies of reputation“.
• Making a name is paramount in virtual markets.
2.3: Digital Market Structure .. 4
2.3.4. Frictions in the electronic and conventional
markets
• The ‘network effect’ eases getting several items
from a source, rather than from several sources.
• It is now easier for many firms to buy components
of products instead of producing everything.
• Outsourcing is now commonplace in the digital
economy.
• Increasingly, firms sell diversified but related
products and services.
2.3: Digital Market Structure .. 5
2.3.4. Frictions in the electronic and conventional
markets
• For example, an online book retailer can as well sell
air tickets.
• The driving force here is the economies of scope.
• A waste disposing firm can produce organic
manures, and at the same time cultivate vegetables.
• Closeness to the consumers makes it easier to
better decipher the demand
• It also helps to tailor production to the single
customer.
2.3: Digital Market Structure … 6
2.3.5. Transparency of virtual markets.
• The e-economy can be called a ‘nude economy’ due
high transparency of the Internet.
• It is possible to search for any thing on the internet.
• The ease that can be gathered, analyzed and
interpreted has simplified marketing research.
• The high level of mutual transparency makes it
difficult for consumers to be deceived.
• Consumers easily identify how to make some gains,
and producers know their customers quite well.
2.3: Digital Market Structure ..7
2.3.6. Economies of enterprise size in the Internet
world
• The vast opportunities to enter the value chain
create key roles for the small innovating firms.
• Smaller firms can easily supply components for
larger firms.
• But larger firms have goodwill and scope to diversify
much faster than small firms.
• Consumers and down line firms prefer to buy
variety of items from one source, rather than from
several sources.
2.3: Digital Market Structure ..8
2.3.7. Market structures in virtual markets
• Modern ICT enables the creation of a better and
clearer view of the market.
• It may seem that the virtual market indeed
approximates perfect competition in several ways.
• Buyers and sellers generally have access to the
same kind of information
– Leading to high mutual knowledge between consumer
and producer.
• This approximates the perfect availability of
information assumed in perfect competition.
2.4. Conduct Of The Digital Economy
2.4.1. Competitive strategy in the digital economy
• Generally, the e-economy tend to approximate the
textbook model of perfect competition.
• But the threat of entry depends on the industry and
on the final goal of the business.
• In reality it is much easier for a large firm to ‘crossenter‘ a new market.
• For example, it is easier for a big car importer to
also sell computers and its accessories.
• A car retailer can as well offer information
processing tools.
2.4: Conduct Of The Digital Economy ..1
2.4.1. Competitive strategy in the digital economy
• Economies of scope make big firms able to enter
almost every market.
• The e-economy has weakened customer loyalty as it
is very easy to switch to competitors.
• Price competition has become intensified, due to
high level of transparence.
• Price discrimination becomes extremely difficult.
• Firms are compelled to satisfy the consumer by
every means possible.
2.4: Conduct Of The Digital Economy ..2
2.4.1. Competitive strategy in the digital economy
• Costumer’s trust has become increasingly difficult
to get and retain.
• The firms need to do more quality inducing
advertisement.
• Geographical factors are no longer the bases for
competitive advantages.
• The consumer profits from sticking to one company
that already knows him well.
• The high mutual knowledge between buyer and
seller is the basis for costumer loyalty.
2.4: Conduct Of The Digital Economy ..3
2.4.1. Competitive strategy in the digital economy
• Firms in an industry produce substitute products
continually.
• Competition is excessive in the Information-based
firms.
• It is also the case with the music industries, banking
and other intermediary functions.
• Knowledge creation has improved performance
significantly.
• Buyers compete by forcing down prices and
bargaining for higher quality or more services.
2.4: Conduct Of The Digital Economy ..4
2.4.1. Competitive strategy in the digital economy
• Some buyers also play competitors against each
other as they seek more favorable prices.
• Consumer sovereignty has compelled firms to
collaborate and compete at the same time.
• Suppliers are compelled to trust each other. But
infomediaries are replacing traditional ties.
• Suppliers bargaining power is decreasing.
• The high transparency introduced by B2B practices
is at the heart of network relationships.
2.4: Conduct Of The Digital Economy ..5
2.4.2. Money and payment
• A sound Internet payment system requires security,
reliability, scalability, anonymity, acceptability,
customer base, flexibility, convertibility, efficiency, ease
of integration with applications, and ease of use
– Security: the infrastructure supporting electronic
commerce must be usable and resistant to attack.
– Reliability: the infrastructure must be highly
available and should avoid any form of failure.
– Scalability: The payment infrastructure must
support multiple servers, distributed across the
network.
2.4: Conduct Of The Digital Economy ..6
2.4.2. Money and payment
– Anonymity : the identity of the parties to the
transaction should be protected. Tracking a
transaction should be made highly expensive and
difficult.
– Acceptability: the e-payment instrument must be
accepted widely and unrestricted by time and space.
– Customer base: the customer base should be vast
and well spread for wider acceptability.
– Flexibility: the payment mechanism should support
several payment methods and instruments that
should be integrated into a common framework.
2.4: Conduct Of The Digital Economy ..7
2.4.2. Money and payment
– Convertibility - it should be possible and easy to
move funds from one instrument and currency to
another.
– Efficiency: the cost per transaction of using the
infrastructure must be insignificant.
– Ease of integration: the payment system should
be pliable to upgrading and modifications.
– Ease of use: most payments should occur
automatically, and users should be able to
monitor their spending without going out of their
way to do so.
2.4: Conduct Of The Digital Economy ..8
2.4.3. Innovation
• The traditional notion of innovation is linked to
R&D, pecuniary expenses, scientific or technical
expertise and procurement of equipment.
• In the e-economy, innovation is linked to the
conception and implementation of new ideas.
• The new ideas need the scale of big companies in
order to get widely accepted.
• Inter-firm cooperation is important; cooperation of
firms with the academia is also needful.
2.4: Conduct Of The Digital Economy ..9
2.4.3. Innovation
• Firms innovate faster when they can access and
implement acquired knowledge rapidly.
• This calls for strong link between internal
innovativeness and external innovations.
• Internal innovativeness eases adopting knowledge
produced outside the firm.
• Generally, collaborating firms are more innovative
than non-collaborating ones.
• Collaboration is as important for a big company, as
it is for a small start-up.
2.4: Conduct Of The Digital Economy ..10
2.4.3. Innovation
• External economies of scale are a basic driving force
in the e-economy.
• Internet is the ‘big equalizer’, as all firms and
individuals can work with same information.
• Constantly, collaborations unconsciously develops
and extends the frontier of innovativeness.
• Everyone involuntarily swims through different
waves of innovation at the same time.
• What distinguishes firms is the ‘lead time’ of each
player.
2.4: Conduct Of The Digital Economy …11
2.4.3. Innovation
• It is not necessarily ‘how good’, but ‘how fast’ a
firm or consumer is.
• Reward in the e-market is driven by “economies
of time” or ‘first-mover-advantage’.
• The cost of new technologies is reducing at a
very fast rate:
– For example, a laptop made in 2014 will cost
far less than its 1975 model, and as well have
much higher processing power.
1.
2.
3.
4.
5.
Review Questions
Digital goods are generally not governed by the
conventional economic notions of scarcity. Discuss
Explain the destructive creation powers of the
internet economy.
Explain how digitalization has changed the
structure of the market economy.
Explain the economies of goodwill and scope in
the digital economy.
Explain how the new economy has made
corporation of enterprises with researchers and
the academia very important.
Session 3: Pricing Behavior
• Prices in the e-markets are falling in the long run for
the average consumer.
• But the cost of e-purchase should be higher that at
a physical ‘take-away’ store.
• Global openness and transparence of e-markets is
making it more difficult to discriminate in prices.
• The different types of discrimination are as follows:
– First-degree price discrimination: also known as
perfect price discrimination. The seller charges a
different price for each unit of the good based on
the costumer’s maximum willingness-to-pay for
that unit.
Session 3: Pricing Behavior …1
– Second-degree price discrimination: also known as
nonlinear pricing. Price differ depending on the number
of units of the good bought, and not across costumers.
– Third-degree price discrimination: different purchases
are charged different prices. But each purchaser pays a
constant amount for each unit of the good bought.
• The e-markets give buyers and sellers equal access
to retailer information about prices.
• Success depends on how well either party is using
the full potential of the Internet for his best benefit.
• Online auctions is common and Customer-toCustomer (C2C) sites have increased.
Session 3: Pricing Behavior ..2
• The sites act like an intermediary, facilitating deals
between parties.
• Many e-markets now approximate the stock
market, with prices adjusting constantly.
• A dominant dynamic pricing model is known as
‘demand-based pricing’.
– This is based on the concept of volume
discounts in the beginning.
– Shopping sites allow users to commit to buy a
product if the price drops at least to a specified
level within a time period, usually a few days.
Review Questions
1.
2.
In what ways is the internet making price discrimination
difficult.
Do you agree that the internet has made many services
and commodity markets to approximate the stock
market with constan
Session 4: Behavior of Firms
4.1. Connectivity And Firm Behavior
• Inner-firm Management – Interconnectivity has
accelerated the speed of decision making.
• Requires Less Staff, Flat Hierarchies And More
Democratic Leadership Models.
• ICT Has Multiplied The Teamwork Potential.
• Production Life Cycles Are Getting Shorter And
Management Reactions Quicker.
• 10 Year Planning Is Increasingly Unrealizable.
• Long Term Thinking In Virtual Markets Means One
Year.
4: Behavior of Firms ..1
4.1. Connectivity and firm behavior
• Networking between firms – in e-markets the
parties are only one mouse click away.
• Virtual platforms where companies can offer
their goods are created continually.
• Inability to make extra profits makes
applicability of perfect competition possible.
• Equally, through company extranets and
industry trading exchanges, firms are linked to
their trading partners.
4: Behavior of Firms ..2
4.1. Connectivity and firm behavior
• Increasingly also, more players along the value
chain collaborate.
• This reduces inventory, increases sales and
improved service levels.
• Trading partners and producers share their
plans and deal with possible deviations.
• By working on issues before they occur, both
partners have time to react.
4: Behavior of Firms …3
4.1. Connectivity and firm behavior
• Building brand awareness through advertising
and marketing is critical for success.
• To support branding many firms develop
exciting affiliate programs.
• For example, a website owner can partner
with an affiliate program or producers.
• The web site owner is paid a commission for
generating the sale.
4: Behavior of Firms ..4
4.2. Dis- and re-intermediation
• Many have argued that e-markets have
reduced the importance of intermediation.
• The “direct business model”, link customers
and suppliers via customized Intranet sites.
• Elimination of margins by the ‘direct business
models’ mean complete disintermediation.
• The more common ‘disintermediation’ is due
to elimination wholesale and retail sectors.
4: Behavior of Firms .. 5
4.2. Dis- and re-intermediation
• However, a theory of ‘re-intermediation’ by means of
‘infomediary’ has been developed.
• Informediaries in made possible by the fact that all
parties search the internet.
• All parties rely on web-based intermediaries that
maximize the value of their data.
Review Questions
• In which ways has the internet promoted the role of
infomediaries?
• The internet has weakened the roles of distributors
and retailers. Discuss.
Session 5: Product Strategy and Advertising
• Firms and individuals now desire customized
set of products and services.
• Firms along the value chain often collaborate
to make this possible.
• Software solutions facilitate the entire
customer lifecycle:
– from driving web traffic to the website,
– to capturing leads and guiding customers through their
buying process,
– enabling online purchasing and payment,
•
•
•
•
5: Product Strategy and Advertising …1
– coordinating delivery
– and providing them with pre or post-sale
customer service.
The e-economy gives marketing more expansive
role, beyond just selling.
Customer Relationship Management (CRM) has
become very essential.
Pre- and post-sale services have far-reaching
significance in virtual markets.
In addition, managing supply and value chains have
become very important.
5: Product Strategy and Advertising …2
• Typically a marketer now needs to understand supply
chain planning system, procurement system, logistics
system, and ‘streamlined business production’ or
‘automated supply-chain integration’:
– a supply chain planning system, a firm forecasts
and plans how to match supply to demand on a realtime basis;
– a procurement system, a firm shares information
with the suppliers and service providers to ensure
that it has the right supply of parts and components
available;
– a logistics system, a firm ensure its products are
delivered to customers in the shortest possible time.
5: Product Strategy and Advertising ..3
– Streamlined business production, the Internet
connects parties and facilitates information
exchange.
– Demand and supply chains get integrated to deliver
faster time-to-market for the company’s products.
– The supply chain links the producers and all trading
partners to customers via the internet.
– Collaboration across the extended network of
trading partners ensures product delivery in the
shortest time and at the lowest cost.
• Analysis-driven workflow can streamline business
processes even further.
5: Product Strategy and Advertising ..4
• For example, analytic software can identify
needs based on observed trends.
• Success with trading in the virtual market
requires product promotion and advertising.
• The e-economy provides diversity of
marketing models:
–viral marketing, B2C marketing, affinity
marketing, partner marketing, affiliate
programs, B2B marketing, co-marketing, emarketing, m-commerce marketing, etc.
5: Product Strategy and Advertising ..5
• Customer Relationship Management (CRM)
the retailer’s interaction with the customer
generates information about his preferences.
• The information is recorded and analyzed for
the producer to meet customer wants.
• This process of ‘capturing and analyzing’ is
commonly known as CRM.
• CRM Solutions deliver a complete lifecycle
view of customer interactions;
– from creating targeted marketing campaigns,
5: Product Strategy and Advertising .. 6
– generating leads and forecasting the potential sales
opportunities
– to managing customer relationships across multiple
integrated channels
– the goal is complete personalization of the virtual store.
• This makes advertising more impactful and throws
open opportunities for cross-selling.
• Cross-selling has less to do with the personalization
of the product, but rather with the optimization of
the offer.
• For example, shoppers who select televisions are
likely to need video CD players.
Review Questions
1. List and explain the essential components of
supply and value chains.
2. How has digitalization made managing supply and
value chains important?
3. Why is cross selling a growing feature of the new
markets?
Session 6: Other Firm–level Characteristics
6.1. Company finance and the growth of firms
• Venture capital is now a major institutional
and corporate investment good.
• Many large firms now have a venture capital
firm serving as the general partner.
• Some firms setup their venture funds and give
employees a chance to invest in startups.
6: Other Firm–level Characteristics ..1
6.2. Legal tactics
• Internationally, the United Nations Commission on
International Trade Law (UNCITRAL) has completed
work on a model law that supports the commercial
use of international contracts in electronic
commerce.
• This model law establishes rules and norms that
validate and recognize e-contracts.
• It sets default rules for contract formation and
governance of e-contract performance.
• It defines the characteristics of a valid electronic
writing and an original document.
•
•
•
•
6: Other Firm–level Characteristics ..2
The model law provides for the acceptability of
electronic signatures for legal and commercial
purposes.
And supports the admission of computer evidence
in courts and arbitration proceedings.
But, governments generally face the challenge
balancing between free information flow, protecting
property rights, and ensuring consumer privacy.
However, e-contracts can be concluded either
directly through the Web, electronic mail or on EDI
agreements.
6: Other Firm–level Characteristics ..3
• The selected framework should provide security, privacy,
property protection and a reasonable degree of
standardization.
• Security - a secure and reliable “Global Information
Infrastructure (GII)” is required. Four critical security
assurances are required:
– Authenticity of the communication,
– Integrity - proof that contents of the message have not
been altered, either deliberately or accidentally;
– Non-repudiation – the receiver does not deny the
transmission’
– confidentiality evidence of nor disclosure to third parties.
– Privacy – internet users would prefer that the internet has
privacy.
6: Other Firm–level Characteristics ..4
• Intellectual property - commerce on the Internet
often involves the sale and licensing of intellectual
property.
6.3. Standards
• Standards can allow products and services
from different vendors to work together.
• Pre-mature standardization can ‘lock in’
outdated techniques or ‘lock out’ potential
trading partners.
Review Question
Review Question
1. Digitalization poses the challenge of
balancing free information flow, protecting
markets, and ensuring consumer privacy.
Discuss.
Session 7: Macroeconomics of Spillovers
7.1. Role of Government
Support private sector leadership – the e-economy is
better led by the private sector.
• Government should be proactive and supportive of
positive change.
• Internet access, education, and support for youths
in many ways are needful.
• Government should also ensure competitiveness of
markets and development of new technologies.
• Government should also identify and address
market failures.
Session 7: Macroeconomics of Spillovers ..1
• In doing so, government should act as maintainer
and proactive promoter.
Maintaining tasks of government
• Providing laws to ensure fare play and check
exploitation.
• One way of achieving this is to check
monopolization and restricted competition.
• The best known measure is antitrust legislation or
competition policy.
• This aims primarily at preventing the formation of
outright monopoly.
Session 7: Macroeconomics of Spillovers ..2
The promoting task of the government
• This should involve:
–developing e-infrastructure,
–erasing computer illiteracy in society,
–and investing extensively on information
creation, communication, and
interpretation.
• It equally calls for commitment to life-long
learning and learning-by-doing.
Session 7: Macroeconomics of Spillovers ..3
7.2. Need for Supranational moderation
• The global character of the world-wide-web
calls for supranational moderation.
• Traditionally there are several forums where
government representatives meet.
• Further negotiations could build on the
expertise accumulated in certain forums on
particular issues.
• Since, the Internet is difficult to control by a
single organization or government, NGOs may
have some roles to play.
Session 7: Macroeconomics of Spillovers ..4
• Despite its overwhelming importance, ICT has
been widely faulted on several grounds.
• It is argued that ICT has failed to generate
broad-based multifactor productivity (MFP)
improvement.
• The debate on the MFP incapacities of ICT is
widely known as the ‘productivity paradox’.
• It was observed that productivity slowed
down around 1973, just about the time
computers became popular.
Session 7: Macroeconomics of Spillovers ..5
• Productivity has remained sluggish ever since.
• However, the creation of new knowledge in
the e-economy is a crucial “input factor”.
• Knowledge creation is also an important cost
saving innovation.
• The IT industry also has a major direct impact
on growth and inflation.
• This kind of growth would fall under increase
of stock capital ceteris paribus.
Discuss the role of government in the new
Review Question
1. Discuss the role of government in the new
economy.
2. The e-economy generates new knowledge
at a faster rate, yet overall productivity of
the global economy has been on the
decline. Discuss this “productivity paradox”
of the new markets.
Session 8: The Digital Economy and Economic Growth
• The accelerated demand for IT products is the
driving force in many economies since 1994.
• The e-economy also raises the quality of an
economy’s workforce and increases income.
• All of this considered, ICT should lead to a
permanent increase in productivity.
8.1. Digital divide and the catch up
• “Death of distance" of the e-economy should
bring our world closer.
• But its realization calls for broad accessibility.
8: The Digital Economy and Economic Growth ..1
• Affordability of the e-infrastructure is required
for effective participation in the e-economy.
• But the - digital divide - between those with
access and those without is high.
• The digital divide is having tremendous effects
nationally and globally.
• Innovations grow like ‘mushrooms’, popping
up, almost overnight, unpredictably.
• This is because technical progress is driven by
an unequally distributed ‘creative destruction’.
8: The Digital Economy and Economic Growth ..2
• This means that some people will benefit from
the advances before others.
• Those who live around where the “mushroom
of innovation” popped up benefit first.
• Access to telecom networks is critical for
dissemination of innovations.
• OECD countries accounted for 69.2% of the
741 million main telephone lines in 1996.
• Tele-densities ranged from 45- 65 per 100
population in the developed countries.
8: The Digital Economy and Economic Growth ..3
• The average was 5.2 in the major non-OECD
economies, 4.5 in China, and 1.5 in India.
• More than half of the world’s population have
never made a telephone call.
• Yet a city like New York has more telephones
than all of rural Asia.
• And London has more Internet accounts than
in all of Africa.
• LDCs pay on average three times more than
rich country users to access the net.
8: The Digital Economy and Economic Growth ..4
• An UNCTAD study notes that 20 access hours
a month in 1999 cost $90 in Mexico or 15% of
average income.
• Compared with only $25 in the US, a mere 1%
of average income.
• In Africa, average access charges top $200 a
month.
• Differences in ‘hardware-distribution’ affect
distribution of benefits from e-markets.
• Advanced economies will naturally gain more.
8: The Digital Economy and Economic Growth ..4
• Poorer countries need to “catch up” with
OECD countries where advances are made.
• Some people see the Internet as the “Big
Divider” since it is not universally accessible.
• Inaccessibility make sit difficult to keep up
with general development.
• Others claim the Internet to be the “Big
Equalizer”.
• Generally, it is difficult to bring everybody up
to the same level.
8: The Digital Economy and Economic Growth ..5
8.2. Skill requirements
• Technological change promotes industry
growth and demand for skilled workers.
• Future employment demands favor highly ICTcompetent workers.
• ICT has been incorporated into nearly all jobs
and professions.
• A high level of computer literacy is an
essential component of every job.
8: The Digital Economy and Economic Growth ..6
• The preferred employee is a “knowledgeable
worker”.
• Employers prefer employees who are abreast
with current development and trends.
• Retraining of labor force will be an important
task for employers in the coming years.
• Policies to cope with skill mismatches are
already a concerns in many OECD countries.
• The ‘death of distance’ is raised a pool of high
mobile international workforce.
8: The Digital Economy and Economic Growth ..7
• Some workers just need to work online from
their homes.
• Overtime virtual offices situated in
cyberspace—will become more common.
• Equally, working is increasingly linked to
traveling and tourism.
• Many argue that the e-economy has not
delivered a ‘leisure society’.
• It is claimed that those who have jobs today
work harder and longer than before.
8: The Digital Economy and Economic Growth ..8
• Virtual employments and multi-tasking have
created challenges for the labour market.
• Components of an assignment can be done in
several locations without workers having to
physically relocate.
• This international division of labor has created
challenges for immigration laws of states.
• Given the global scale and transparence of the
e-economy, the reward for talented workers
has increased.
8: The Digital Economy and Economic Growth ..9
• The income of low skill workers have reduced
leading in wage inequalities.
• Realities of the e-economy question the
coherence of the industrial age.
• However coherent paradigms of the eeconomy are yet to emerge, due perhaps to
fluidity of the present age.
Review Questions
1. How has the growing “digital divide” affected
productivity of the global economy?
Suggested Materials
• Iwuagwu, Obi (2011). The Cluster Concept: Will Nigeria’s New Industrial
Development Strategy Jumpstart The Country’s Industrial Takeoff? Afro Asian
Journal of Social Sciences 2(2-4) 1-24
• Hilbert, Martin R. (2001). From industrial to digital economics: an introduction to
the transition. A Publication of Restructuring and Competitiveness Network,
Santiago, Chile,
• Barthwal, R. R. (2010) Industrial Economics: An Introductory Textbook (3rd Ed) New
Age International, India
• MIT (2003) Course 14.23 Government Regulation of Industry (Class 1) The
Cambridge –MIT Institute of Electricity Project
• Hinde, k. (2000). The Economics of European Industry Being Lecture Note for NIT
EC455 Level 3, Semester 2
• Symeonidis, G. (2011) Industrial Economics Being Lecture Notes EC3099, 2790099.
University of London International Programme
• Lecture Notes on Industrial Organization and Competition Policy. Module 1: Basic
Concepts in Microeconomics. Cost concepts. Http://httpserver.carleton.ca/~dmcfet/courses/lectures3.pdf
• Cabral, L. (2013) Introduction to Industrial Organization (2nd Ed.) Teaching Notes
• Marcos Anabela (undated) A New Marketing Paradigm in the Knowledge Economy