How the Digital Economy Affects Markets and Firms

Market information

Price comparison sites

  • Markets commonly have ‘asymmetric information’ (seller know more than buyers – second hand car salesmen are the classic economic example).

  • Search engines, price comparison websites and consumer reviews have changed this (for those that use the internet that is).

  • Have you ever posted on fb/twitter seeking purchasing advice?

  • Name a price comparison website that you’ve used.

Social media & Viral marketing

  • Social media can be both cheaper and more effective than TV or print.

  • All social media advertisers hope that their messages will go viral.

How the Digital Economy Affects Markets and Firms, figure 1


Online retailing/distribution

  • eRetailing cuts out the middle men, start-ups are faster and cheaper than high street rentals, order processing is simple and valuable consumer data can be collected.

  • ‘Dark stores’ are warehouses that process on-line orders.

  • ‘Bricks and clicks’ – traditional stores alongside an eRetailing option.

  • Unaffected markets?

  • Convenience stores, high street clothing stores, jewelry etc.


  • Data can be collected on lifestyles, spending habits, attributes and attitudes of the target group.

  • This can lead to more focused marketing – ‘micromarketing’; a customised marketing strategy in which advertising efforts are focused on a small, well defined group of consumers.

  • A good example of this is loyalty cards.

How the Digital Economy Affects Markets and Firms, figure 1

Recruiting/training staff with digital skills

  • Growth of the digital economy requires rapid expansion of an ICT skilled workforce.

  • This can be viewed as ‘creative destruction’ in action and workers can be expected to adapt.

  • Though there are recruitment bottlenecks where suitably skilled workers are in short supply.

  • E.g., A shortage of programmers in the UK, and the government’s restructuring of the subject ‘ICT’ to ‘Computing’.

  • A shift in employment patterns is required – the pace of change is very fast though!

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Satisfying consumers with the long tail

  • Niche = specific = unique. It can be less competitive and thus more profitable than focussing on ‘the hits’ market only. E.g. Amazon stock over 4 million different titles of books!

Wider geographical markets

  • The digital economy has sped up globalisation in trade – consumers on any continent can buy directly from suppliers anywhere.

  • PayPal offers a relatively secure global payment system and many credit cards operate worldwide.

  • Thus domestic firms have the opportunity to sell around the world, but are also open to global competition!

  • Consumers benefit from this choice and level of competition though.

How the Digital Economy Affects Markets and Firms, figure 1

Impact on markets and firms - Outline the impact of the digital economy on markets and firms

Impact on costs, prices, profit and loss, firm creation and destruction in a new business environment

  • Information is more accessible, start-up costs are lower (low barriers to entry, thus _generally _encouraging competition (though firm like Microsoft with 75% of OS’s can still exist in the digital economy), lower fixed costs (no need to pay commercial rents! eRetail!). All lead to lower costs, lower prices and potentially higher profits.

  • Firms will make losses if they cannot keep up with the level of ‘creative destruction’, but more flexible businesses will profit from the change

  • Shorter product life cycles mean rapid reinvention is a must (expensive R&D and MR). Also, a ‘low asset’ business means less collateral to borrow against – it’s not all positives.

  • Classic A04 – ‘evaluate the impact of the digital economy on markets and firms’ from the pros vs cons above.