Download Digital Economy

International Journal of Multidisciplinary Research and Development
Online ISSN: 2349-4182 Print ISSN: 2349-5979
www.allsubjectjournal.com
Volume 3; Issue 3; March 2016; Page No: 14-16; (Special Issue)
Digital Economy
K. Myilswamy
Assistant Professor in Commerce (Ca) Vlb Janakiammal College of Arts and Science
Abstract
Digital economy refers to an economy that is based on digital computing technologies. The term 'Digital Economy' was coined in
Don Tapscott's 1995 best-seller The Digital Economy: Promise and Peril in the Age of Networked Intelligence.
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 that have accumulated around networking technology.
The commercial supply of Internet access began when the National Science Foundation removed restrictions for using the
Internet for commercial purposes. Digitization has coincided with the increased prominence of platforms and marketplaces that
connect diverse agents in social and economic activity. Digitization of retail and marketing meant that consumers could easily
compare prices across stores, so the empirical work on Internet pricing examined the impact on prices and price dispersion.
Digitization has partially or fully replaced many tasks that were previously done by human laborers. At the same time, computers
have made some workers much more productive. One main area of policy interest related to digitization concerns intellectual
property. The justification for giving copyright and patent right relies on the theory that the potential to gain these right
encourages the production and sharing of intellectual property. Privacy and data security is an area where digitization has
substantially changed the costs and benefits to various economic actors. Traditional policies regarding privacy circumscribed the
ability of government agencies to access individual data.
Keywords: Digital, computing technologies
Introduction
Digital economy refers to an economy that is based on digital
computing technologies. The digital economy is also
sometimes called the Internet Economy, the New Economy, or
Web Economy. Increasingly, the "digital economy" is
intertwined with the traditional economy making a clear
delineation harder.
Definition
The term 'Digital Economy' was coined in Don Tapscott's
1995 best-seller The Digital Economy: Promise and Peril in
the Age of Networked Intelligence. The Digital Economy was
among the first books to show how the Internet would change
the way we did business. It became an international bestseller within one month of its release, appearing on a number
of best-seller lists, including the New York Times Business
Book list and a seven-month run on the BusinessWeek best
sellers list. BusinessWeek also named The Digital Economy
the top selling business book for 1996.
Information Technology and Access to Networks
Technological Standards
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) 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 nonprofit 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 Supply of Internet Access
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 25Mbit/s from one
provider and a majority only have a choice of two providers
for 10Mbit/s service. Economists are particularly interested by
competition and network effects within this industry.
Demand for the Internet
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 rely on inputs
with zero price.
14 The Effects of Digitization on Industrial Organization
Platforms and Online Marketplaces
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 are within
platforms because participation by one group affects the utility
of another group. Furthermore, 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
successful online platforms 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. 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.
User-Generated Content and Open Source Production
Digitization has coincided with the production of software and
content by users who are not directly compensated for their
work. Furthermore, those goods are typically distributed for
free on the Internet. Prominent examples of open-source
software include the Apache HTTP Server, Mozilla Firefox,
and the GNU/Linux operating system. Economists are
interested in the incentives of users to produce this software
and how this software either substitutes or complements
existing production processes. Another area of study is
estimating the degree to which GDP and other measures of
economic activity are mis-measured due to open source
software. For example, Greenstein and Nagle (2014) estimate
that Apache alone accounts for a mis-measurement between
$2 billion and $12 billion. In addition, open source production
can be used for hardware, known as open hardware, normally
by sharing digital designs such as CAD files. Sharing of open
hardware designs can generate significant value because of the
ability to digitally replicate products for approximately the
cost of materials using technologies such as 3D printers.
Another active area of research studies the incentives to
produce user-generated content such as Wikipedia articles,
digital videos, blogs, podcasts, etc.
The effect of digitization on consumer choice Search,
search engines and recommendation systems
Perhaps the oldest and largest stream of research on the
Internet and market frictions emphasizes reduced search costs.
This literature builds on an older theory literature in
economics that examines how search costs affect prices.
Digitization of retail and marketing meant that consumers
could easily compare prices across stores, so the empirical
work on Internet pricing examined the impact on prices and
price dispersion. Initially hypothesized by Bakos (1997), the
first wave of this research empirically documented lower
prices, but still substantial dispersion. The newest wave of this
research collects data about online searches to examine the
actual search process that consumers undertake when looking
for a product online. This question also emphasizes that the
final stage of purchase is often controlled by a more familiar
retail environment, and it raises questions about the growing
importance of standards and platforms in the distribution of
creative content. As noted earlier, near-zero marginal costs of
distribution for information goods might change where and
how information goods get consumed. Geographic boundaries
might be less important if information can travel long
distances for free. One open question concerns the incidence
of the impact of low distribution costs. The benefits might
vary by location, with locations with fewer offline options
generating a larger benefit from digitization. Furthermore,
online retailers of digital goods can carry many more products
and never worry about running out of inventory. Even if a
song only sells a handful of times, it is still profitable to be
offered for sale on the Internet. At the same time, the zero
marginal costs of distribution mean that top-selling (superstar)
items never go out of stock and therefore can achieve even
higher sales (Anderson, 2006). Several papers in the literature
attempt to quantify the economic impact of increased product
variety made available through electronic markets. Bar-Isaac
et al. (2012) derive a theory of when lower search costs will
result in 'superstar' and 'long-tail' effects.
Effect of Digitization on Labor Markets
Digitization has partially or fully replaced many tasks that
were previously done by human laborers. At the same time,
computers have made some workers much more productive.
Economists are interested in understanding how these two
forces interact in determining labor market outcomes. For
example, a large literature studies the magnitude and causes of
skill-biased technical change, the process by which technology
improves wages for educated workers. Alternatively, Autor
(2014) describes a framework for classifying jobs into those
more or less prone to replacement by computers.
Furthermore, the use of information technology only increases
productivity when it's complemented by organization changes.
For example, Garicano and Heation (2010) show that IT
increases the productivity of police departments only when
those police departments increased training and expanded
support personnel. Another consequence of digitization is that
it has drastically reduced the costs of communication between
workers across different organizations and locations. This has
led to a change in the geographic and contractual organization
of production. Economists are interested in the magnitude of
this change and its effect on local labor markets. A recent
study found that the potential of manufacturing sector jobs to
be offshored did not reduce wages in the US. However, survey
evidence suggests that 25% of American jobs are potentially
offshorable in the future.
Online labor market platforms like Odesk and Amazon
Mechanical Turk represent a particularly interesting form of
15 labor production arising out of digitization. Economists who
study these platforms are interested in how they compete with
or complement more traditional firms. Another active area of
research is how to incentivize workers on these platforms to
produce more efficiently.
Government Policy and Digitization Intellectual Property
and Digitization
One main area of policy interest related to digitization
concerns intellectual property. The justification for giving
copyright and patent right relies on the theory that the
potential to gain these right encourages the production and
sharing of intellectual property. However, digitization and
piracy has made it difficult to defend intellectual property
rights, especially in the case of copyright. Varian (2005)
supplies a theoretical framework for thinking about this
change from an economics perspective.
Usually, the economic effect on copyright-holders in the
context of free copying is considered to be negative. However,
Varian suggests an important counter-argument. If the value a
consumer puts on the right to copy is greater than the
reduction in sales, a seller can increase profits by allowing that
right. Varian also provides a detailed description of several
business models which potentially address the greater
difficulty of enforcing copyrights as digitization increases.
Alternative business models for intellectual property holders
include selling complementary goods, subscriptions,
personalization, and advertising. Empirical research in this
area studies the effects of Internet file-sharing on the supply
and demand for paid content.
firm's effort in securing data from an economics perspective.
They find that direct competition reduces the time that a firm
takes to patch a vulnerability to its software. Other attempts at
measuring the consequences of information security policy
from an economics perspective are Miller and Tucker (2011),
who look at policies mandating encryption, and Romanosky et
al. (2011), who look at mandatory breach notification laws.
Conclusion
Digital economy is based on electronic goods and services
produced by an electronic business and traded through
electronic commerce, a business with electronic production
and management processes and that interacts with its partners
and customers and conducts transactions through Internet and
Web technologies. . Many observers have noted the rapid
growth of the broadly defined digital economy. Much
attention is being paid to the ongoing and dramatic growth in
electronic or e-com erce.
Privacy, Security, and Digitization
Privacy and data security is an area where digitization has
substantially changed the costs and benefits to various
economic actors. Traditional policies regarding privacy
circumscribed the ability of government agencies to access
individual data. However, the large-scale ability of firms to
collect, parse, and analyze detailed micro-level data about
consumers has shifted the policy focus. Now, the concern is
whether firms' access consumer data should be regulation and
restricted. In the past decade, theoretical work on commercial
privacy has tended to focus on behavioral price discrimination
as being a potential application of a context where researchers
can model privacy concerns from an economics perspective.
Goldfarb and Tucker (2011a) wrote the first paper to
empirically study the economic effects of privacy regulation
for the advertising-supported Internet. The implementation of
privacy regulation in Europe has made it more difficult for
firms to collect and use consumer browsing data to target their
ads more accurately; the field test data shows these policies
are associated with a 65 percent reduction in the influence
banner ads have on purchase intent.
As well as this main effect, their research also suggests that
privacy regulation might change the web landscape in
unanticipated ways, with advertising becoming even more
intrusive. It also might lead marketers to shift their media buys
away from newspapers because of difficulties in finding
relevant advertising to show. Another related concern is what
precautions firms should take to prevent data breaches such as
those at Target and Staples. Arora et al. (2010) models the
16