Digitalization of the Global Economy: Monopolies, Personalized Prices and Fake Valuations

Market power of local suppliers is reduced

Digitization can reduce the market power of individual providers. If only one provider of electrical appliances operates a store in a rural area within a radius of 50 kilometers, she can charge surcharges for her products and thus increase her profits. However, if there are internet-based search engines and online platforms, interested parties can search for other offers of equal quality and exploit price differences.

The danger of digital monopolies is growing

On the other hand, digital goods and the platform markets often associated with them have characteristics that make it easier to create monopolies:

  • The construction of networks is associated with very high initial costs. The same applies to the development of operating systems and application software. However, the reproduction and delivery of a computer program is often done via a download (like with music) and has a marginal cost close to zero. As a result, the company that offers the greatest quantity has the lowest unit costs and can demand the lowest price. Long-term, only a few or even just one supplier can survive in the market.
  • Digital platforms often have a network characteristic. The more participants in a social network or an online file-sharing platform, the more attractive it is for people to join the correspondingly large network. In the end, the company that has the most participants prevails (“Winner takes all” phenomenon).

Market transparency is increased

The theoretical ideal in economics is to attain a state of perfect competition. One assumption of “perfect competition” is market transparency. If all market participants have all market-relevant information for a particular good, at any given time, there is only one price for a good that is traded on the market.

New information asymmetries arise

Although digitization, in principle, can increase market transparency, it may lead to the emergence of new information asymmetries. For example, providers can use systematic big-data analysis to obtain information about potential customers’ maximum willingness to pay.

Consumers do not know the value of their data

Many online services offer their services without demanding a price expressed in monetary units, but users pay anyway when they provide data. Service providers use this data for their business models, which are based on the collection, analysis, and exploitation of user data. The use of customer data enables them to estimate the value of user data reasonably well.

Fake ratings lead to wrong consumer decisions

On many platforms, users can evaluate offers and thus provide information about the quality of services offered to other potential buyers. From the consumer’s point of view, the given ratings must be meaningful. However, this is by no means guaranteed: Companies have a high interest in good ratings that can increase their sales. There are two possible ways of doing this:

  • Companies can commission customers or service providers to evaluate their services as better than they are.
  • Companies have an interest in negative ratings for competitors and can pay third parties to give negative reviews.

Conclusion and outlook

The fundamentally positive effects of digitization technologies are countered by several economic risks. To realize the potential benefits for consumers, we must counteract too strong monopolization tendencies, the adverse effects of personalized prices, and fake valuations via appropriate regulations.

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