The Digital and the Market

Internet, predictably, provoked the time-honored silhouette of business, government and society interfaces. Critics notwithstanding, pervasive digitalization, indubitably, is causative to geometric spread of organically evolved markets. The ubiquitous internet ecosystem, chaotic as it may seem, is trenchant in dismantling the sources of market failure.

Changing Price Elasticity

Price discrimination manifests itself from airfare differentials across portals; loan and deposit rate differential across banks and among customers of similar hue, inter-firm differentials in insurance premium, among others. Information asymmetry surfaces in consequence of cognitive costs of choice evaluation thus making the goods price inelastic. Sites like momondo.com, Google flights, policybazaar.com, paisabazaar.com, confused.com etc. by presenting a simple comparison of prices across firms reduce switching costs thus making products price elastic, consequently lower prices. Narrowing price differentials across firms and websites alike often revise the governing permutations in insurance, banking, airliner, road transport, retail industries among others.

Adverse Selection

Online platforms like Zagat, Rotten Tomatoes, Yelp, Mouthshut.com, E-Bay (merchant ratings) etc. allow users to review and rate vendor experiences. User reviews and ratings, a propos products, services, experiences, vendors etc build reputation of the online ‘agent’, an elemental part of the e-commerce ecology. With better reputation likely translating into higher success rate, fear of likely low ratings might improve customer services. Reputation as a measure in online communities potentially minimizes possible adverse selection across goods like smartphones, electronic gadgets, jewelry, hotel bookings, road transport bookings, taxi services, used cars, clothes, shoes, fashion accessories etc.

Decentralized Production

Digitalization is restructuring and in few cases dismantling the Coasian firm. If relocating manufacturing units and subsequent IT and IT enabled  outsourcing represented shift of processes from firm to firm, currently, processes are steadily shifting from firms to individuals. Digitally facilitated cost attractiveness of market procurement relative to internal development realigns business models accommodating plethora of heterogeneous individuals with contrasting motivations to perform tasks for them.  Palpably, decentralized production is in infant stages nonetheless pregnant with possibilities. Numerous prospective applications ranging from product design, remote maintenance, software development, business analytics, outsourcing manufacturing (different from existing contractual arrangements with vendors Chinese or otherwise), restructuring of franchising models are few manifestations.  Threadless.com allow users to design t-shirts, the most popular (chosen through user voting) being produced. Local Motors allow users to design and assemble cars at host of microfactories. 3D Printing apparently shifts host of factory based production to home based production. Individual efforts apparently drive drone industry than centralized Fordian model.

Decentralized Exchange

Augmented connectivity unfettered by geography, class or scale, market places like E-bay, Etsy, and Amazon allure small producers with irresistible opportunities. Platforms like Craigslist of OLX illustrate encompassing of C2C models in the traditional world of B2B and B2C exchanges. Items from mobile handsets to houses to cars to two-wheelers to host of electronic home appliances find easy buyers and sellers filling critical gap in conformist models of exchange besides being key nodes of price discovery.  Further, virtual communities and user interest groups like IndiaMike, Team-BHP, IRFCA etc by releasing information from confinement of exclusivity, have institutionalized new framework for information exchange.  

Redefined Boundaries of the Firm

Organizations like Wikipedia revolve their production activities through voluntary non monetary contributions of its users. With perhaps a narrow core but thinner external layer contributing in varying degrees at different times, the production is often a dynamic final output.  Arguably, the success of Chinese motorbike firms like Lifan and Zongshen are linked to greater supplier involvement in design and production. Decoding production activities (producing and deciphering and sharing information) of collaborative platforms like Kaggle or open source repositories like GitHub etc. often raise queries like  confining boundaries to admin/moderators or the whole user base. Goldcorp, a leading mining firm, using prize based appropriation to identify hidden gold reserves confirms the trend. Of  greater interest would however be challenging the conventional boundaries of an industry operating on confidentiality and exclusivity.  

Dismantling of Entry and Exit Barriers

The evermore overriding digital narrative is the materialization of the social media as an orb for communication diffusion. Conventional scale hinged narrative is endangered by large number of small time producers often individual or small groups each possessing distinctive niche.  A case in point is Twitter competing with mainstream media in information production and dissipation. First mover advantage no longer affords a luxury of entrenched monopoly.  Facebook might be dominant social media narrative, yet the same was said about Yahoo! Messenger, Orkut and other similar platforms.  Positions in both product and service markets being tricky to uphold, many small time producers prefer a niche linked though affinity of interest than impediment of geography. Sellers on E-bay, Amazon Marketplaces etc. are about ‘Davids’ challenging ‘Goliaths’.  Netflix driven models enabled Bollywood and related players to cost effectively enter American markets for non ‘blockbuster’ films. Yoga as reflection of Indian soft power gets amplified thanks to digitally motivated breakdown of barriers.

Disintermediation of Scale and Technological Barriers

High cost hub and spoke model with unidirectional flow of information from the centre to the periphery compelled economies of scale. Implied is engagement of producers in producing large number of identical copies of products, services and information, resulting in a vertically integrated industry. Internet offers autonomy of choice for individual recipient of information and communication through opportunities of presenting multiple versions of narratives.  Conversations traverse from the confines of a passive private to active engagement with the outside fraternity unbounded by dictum of what, how and for whom to produce information. Decentralized conversations unimpeded by scale and landscape and stimulated by non proprietary sources of communication capacity ensues qualitative diversification and independence of information  Platforms like YouTube, SoundCloud etc allow individuals to directly offer their compositions to consumers. Incidentally, the rise of Big Five in music industry was to establish a medium between singer/performer with her audience. For numerous prospective artists/performers starved of opportunity in the Pareto driven economy with limited opportunities offered by the music industry the only alternative, technological disintermediation perhaps seem a windfall. The upswing in direct publishing models is threatening the mainstream publishing industry. Similar movements are visible across industries like films, documentaries etc.

Lowering Search Costs

Industries like retail as platform for price and product comparison serve towards minimizing search costs. Google and the ecosystem it spawned redefine search costs. Search costs are subject to how high one is (or lack of it) on the Google Search results.  Information about product features, comparative analysis, pricing; information on prevailing consumer trends and preferences, inherent perceptions with respect to competitors are available at the stroke of Google Search. For employers, information about skill-sets and temperament about prospective employees are available on tools like LinkedIn. Google Trends capture best prevailing consumer tastes. Social media analytical tools offer consumers vital information about possible purchase decisions. Besides reducing potential adverse selection, low search costs create a surplus, maybe intricate to quantify, yet express the vitality of the economy.

Lowering Contractual Costs

Continuous seeking of lowering contractual costs aided in no small measure by digital medium created a shift towards firm to individual outsourcing therefore the rise of freelancer. These find echo not merely as exceptions but extend to design, technical writing, translation services, business analytics, secondary business research, telephonic/video conference aided marketing research, of  data collection, amateur astronomy, computation basic sciences et al. It is not unusual to find people with day jobs moonlighting maybe just for the pleasure of undertaking some creative pursuits. Firms are conceivably finding easy to hire specialized skill sets than employing generalists, consequently reworking industrial information driven organization.

Lowering Enforcement Costs

InnoCentive an "open innovation" company opened research and development problems to the general public for solutions.  It gives cash awards for the best solutions to solvers who meet the challenge criteria. As opposed to outsourcing, crowdsourcing involves passing on the work to an undefined, generally large group of people, in the form of an open call. Absence of monetary incentives besides encouragement to leverage cognitive surplus, ironically, made enforcement of tasks relatively easier. Modularization and ability to tap wide talent in platforms like sourceforge.net etc. shrinks enforcement costs besides factoring possible exits.

Dismantling Arbitrage and Shrinking Middle Men Industry

Firms like Harbor City Capital Management specialize in leveraging digital marketing arbitrage in acquiring profits. Similarly, digital advertising presents arbitrage opportunities in wider geographical arena. However, lower entry barriers resulting in possible entry of new firms in all probability erode the arbitrage space on offer over the long run.  Absence of equal access to information besides information processing constraints inhibits price discovery.  As a matter of fact, high agricultural prices in India are associated with existence of several value subtracting intermediaries. These intermediaries, maybe essential in the brick and mortar days however, now face obsolescence. Platforms like National Agricultural Markets are likely to eliminate numerous barriers between farmer producer and consumer. Disguised is the movement towards a stronger form of efficient market hypothesis. Stock brokers who occupied critical spaces are experiencing dwindling fortunes thanks to rise in online trading platforms.  Furthermore, the rise in online purchases is threatening retail intermediaries in book publishing, video libraries etc.

Improving Governance Mechanisms

In the world of yesteryears, entrenched narratives were difficult to dislodge. Poor working conditions like in China might have gone unnoticed. Perhaps building pressure on firms to align their priorities in line with ‘fair trade’ might have been difficult. Social media platforms and tools offer rapid counters the top down approaches of the firm and government. The vigilant social media has called the bluff of many organizations in the matter of hours. Leveraging information asymmetry to ensure the imposition of a top-down narrative is increasingly difficult. Integrity violations by political parties, business, nonprofit organizations etc are not only exposed in the social media, intensity of the resultant damage too is often high.

Reframing Hierarchies-Deconstructing Porter Value Chain

The vertical firm delineated clear demarcation of rank, status, accountability, importance etc. Under stress from relocation of manufacturing units offshore to outsourcing and off shoring IT enabled activities, Porterian model is being reframed with the increasing digital expansiveness. Organizations like Wikipedia, Red Hat etc illustrate alternative edifice. To pursue the competitive advantage, leveraging networks outside the orthodox assembly line driven models become exigent. Value addition and relative importance of each activity within the chain are undergoing a metamorphosis. Arguably, the success of Chinese motorbike firms like Lifan and Zongshen might be ascribed to greater supplier involvement in design and production. Furthermore, platforms like Facebook and Twitter generate huge quantum of information, reflecting a collaborative effort of users. Ironically content creation on these platforms is a payoff of the user self interest, culminating in the resultant network externalities. The terms of formation and sustenance of hierarchies however differ in degree with conventional models.  Vertical firm might not disappear nor cede large territory; however they will face competition from alternative hyperarchical power structures.

Markets for ‘Tail’

The ease with which the digital content can be downloaded, created, modified and distributed destabilized the traditional business models. In the traditional brick and mortar model, consumer choice is a product of power law distribution curve, or Pareto distribution, instead of the expected normal distribution curve. Inferred is a creation of certain degree of inequality favoring the upper 20% of the items ("hits" or "head") against the rest ("non-hits" or "long tail") ostensibly due to space constraints and storage costs. To advocates of ‘Long Tail’, products experiencing low sales volume collectively make up a market share often exceeding the relatively few current bestsellers. Digitization of content results in near infinite storage of material with almost zero marginal costs. Studies indicate significant portion of Amazon.com's sales coming from obscure books, generally not available in brick-and-mortar stores. Analysis of movie rentals of Netflix too shows that the cumulative volume of low popularity items exceeds that of high popularity items.

Movement towards Zero Pricing

The more competitive is the market, more the race towards zero. As a matter of fact, outsourcing, off-shoring, external vendors, ‘Walmart’ model, ‘Nike’ model etc. are manifestations of race towards zero. Digital goods being non rivalrous, infinitely expansible, and experiencing zero marginal costs, should command zero price under normal economic theory. The firms perhaps might have to delink prices from marginal costs instead building a link towards offering goods relative to the utility or satisfaction the consumers derive from consumption. Implied in this ‘freemium’ model, basic versions are obtainable free while pricing value additions and value derivations.  Examples include free versions of basic software, free version of basic anti-virus, free email services, free basic company reports, versioning, and online archives of newspapers.

Commodity Traps and Decentralized Innovation

Markets are akin to a greasy pole where differentiators often are replicated effortlessly resulting in commoditization. Motorola Razr’s focus on aesthetics saw its first-mover advantage evaporate as competitors released their versions of aesthetic handsets. TQM, ISO and other quality measures experienced similar outcomes. Commodity trap arises from firm becoming vulnerable when it is neither able to prevent others from imitating or adapting its business/manufacturing process nor can avoid ceding its shelf space to its substitutes.  Apple’s ‘I’ range of appliances created new ecosystems presumably complex to replicate, yet within a short time, clones are materializing.  The all-pervading digitization is shrinking the shelf space of products and services with alacrity. 

Information asymmetry and transaction costs typically result in inefficient innovation markets. To boot, implied demand uncertainty entails large resources to step past incremental innovation. Decentralized innovation traces its roots in adventure sports like surfing, mountain biking, skateboarding etc. Refinement of products, better channeling of feedback loops, and increased reach of user information revealing engender increased returns to scale in innovation besides reducing demand uncertainty.  3D printing, adventure sports, software, analytics demonstrate best digitally buttressed decentralized innovation. Adoption of ‘open’ business models unlock new avenues for innovation markets as obvious from Procter and Gamble’s ‘Connect and Develop’, IBM’s open innovation strategy etc.

Sharing Economies

Business models like commons based peer production (SETI, gene mapping, protein mapping, NASA Mars crater mapping etc) locate themselves on the axis of non monetary appropriation. Wikipedia, Linux etc. demonstrate money need not be a prime motivator for production.  Prize and non monetary forms of appropriation have gained in magnitude and significance. The rise of videos on YouTube, photos on Instagram or Flickr, the virtual user interest communities among others point in similar direction.  Varying motivations prompt participation possibly heralding a new barter system of information exchange in the process overcoming scale erected production barriers. Apart, sharing economies (built on non monetary sharing principles but monetized) have emerged. Digitally shaped sharing economies from Skype (making use of each node connected to Skype to route the communication) to Project Gutenberg (used volunteers to scan and make available for free only books available in the public domain) to Amazon user recommendation (past history of buyers or others purchasing similar products) enable value exploitation of byproducts generated through production and consumption.   

Movement towards elimination of lock-ins

High switching costs result in vendor or customer lock-in thus market imperfections. For heavy industries or technology driven industries, once a machinery or specific technology is installed, it might not make sense to switch time and again resulting in lock-ins. High asset specificity aggravates the matter. Lower search costs go long way in alleviating high switching costs.  The popularity of open source software like Linux, Apache and their clones are in part accounted by lower switching costs. Google or IBM’s advocacy of open source as by few governments are motivated by the need to escape lock-in effects.

Economies of scope

Linkages between investment and the corresponding returns in fields like astronomy, basic biological sciences, geography, geology, chemistry, physics etc. are often unclear. Accordingly, the funding is either through public investment or philanthropy. The huge cost dimensions of developing and utilizing supercomputers and like has forced organizations to look alternative avenues. Servers, laptops, PCs etc come with discrete capacity often resulting in under-utilization of relatively scarce installed storage and processing capacity.  Peer production models allow these systems to find diversified uses for better input utilization or exploitation of economies of scope. The internet driven linkages across devices across the world for computational purposes without affecting their basic tasks performed by users ensues the societal distribution of costs enabling them to reap external economies of scope and scale. It also has resulted in the emergence of cloud computing both on commercial and non commercial platforms. Clouds link up systems and allocate data for systems that are relatively free thus ensuring better usage of system storage and processing speed. Instances abound from computational biology, protein mapping, and mapping of human genome, computational chemical and biological sciences, and search for aliens (SETI) among others.  

Ease of Consumer Preference Identification and Measurement

The size and heterogeneity of consumers limits identification and understanding of consumer preferences to approximations. Digital domain contests the unevenness in understanding preferences. It is not unusual to find users taking to social media to express their feelings about their consumption activities. For a data buff, social media is a gold mine to unearth expressions of quality, price, value proposition, perception, user experience, customer relationship etc. from cars to bikes to electronic gadgets to durables to experiences in hotels and restaurants to travel experiences amongst others. The blogosphere offers unadulterated content on user experiences and can be tapped through several data mining and analytics tools generating feedback exercise for appropriate course corrections. In fact, firms are leveraging Google Trends to keep real time updates about changing preference patterns. First few entries in Google Auto Complete are recurrently used as a proxy to determine changing fortunes of a product or service.

Linking Firm Strategy from Attention to Action

Firms find difficult to establish direct linkages between resources spent on advertising, promotions, public relations etc. and firm value. Models like pay per click go beyond attention to measure and identify consumer interest. The fact the consumer clicks indicates her potential desire and perhaps interest in purchase. Adaptations of these models pioneered by Google Advertising are being used by various online platforms. Digital helped firms step past the barrier of attention creation towards a logical outcome of final purchase. This shift might be accounted by the breakdown of the customary richness-reach tradeoff. Richness is measured by bandwidth, extent of interactivity and extent of customization information. Higher the richness, lower the reach and vice versa.  In electronic medium, the information unbundles itself from its physical carrier offering abundant possibilities, permitting the firm to reach large audience without affecting the richness of information, thus offering ample avenues for due diligence. This makes the firm’s task easier to link the strategic goals towards action.

Concluding Remarks

Digital expansiveness suggests strong movement towards the spread of towards a development of greater competition, increased availability of choice, spirit which liberates from the lock-ins, controls that threaten to take the market into a monopoly and like. Despite some narratives indicating digitally facilitated elixir of proletarian empowerment, it spreads exponentially the movement towards freedom of choice and expression for both producer and consumer alike traversing unchartered frontiers.