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From Industrial Economics to Digital Economics: an Introduction to the Transition 100 S E R I E desarrollo productivo From industrial economics to digital economics: an introduction to the transition Martin R. Hilbert Restructuring and Competitiveness Network Division of Production, Productivity and Management Santiago, Chile, February 2001 From industrial economics to digital economics This document was prepared by Mr. Martin R. Hilbert, Consultant, Division of Production, Productivity and Management of the Economic Commission for Latin America and the Caribbean of the United Nations (ECLAC). The views expressed in this document, which has been reproduced without formal editing, are those of the author and do not necessarily reflect the views of the Organization. The author would like to express gratitude to the to the following people for their support in carrying out the study: besonders meiner Familie, Francisco Gutiérrez, Joseph Ramos, Massimo Scapini, Martin Hubmann, Janine Berg, Paulina Barrera, and especially Jorge Katz, to whom I am heavily indebted for his structural guidance, valuable input, for his time and energy, and whom I admire for his open-mindness, which is so necessary- but still so often missing nowadays. United Nations Publication LC/L.1497-P ISSN: 1020-5179 ISBN: 92-1-121297-9 Copyright © United Nations, February, 2001. All rights reserved Sales No.: E.01.II.G.38 Printed in United Nations, Santiago, Chile Applications for the right to reproduce this work are welcomed and should be sent to the Secretary of the Publications Board, United Nations Headquarters, New York, N.Y. 10017, U.S.A. Member States and their governmental institutions may reproduce this work without prior authorization, but are requested to mention the source and inform the United Nations of such reproduction. CEPAL - SERIE Desarrollo productivo No 100 Contents Abstract ........................................................................................ 9 Introduction ..................................................................................... 11 I. New basic conditions............................................................ 11 1. Revolution, evolution or hype? .......................................... 11 2. The knowledge society ........................................................ 13 2.1 The positive loop effect of knowledge creation........... 13 2.2 The impact of modern ICT........................................... 15 2.2.1 Computer......................................................... 15 2.2.2 Interconnectivity ............................................. 15 2.3 Production process and evaluation of knowledge........ 17 2.4 The knowledgeable worker.......................................... 18 3. Inter-net-working................................................................. 19 3.1 Cyberspace................................................................... 19 3.2 The net of nets.............................................................. 20 3.3 Think network.............................................................. 20 3.4 Information overload.................................................... 21 4. The dynamic of science ....................................................... 22 5. Measuring the digital economy ........................................... 23 5.1 Virtual guesswork ........................................................ 23 5.2 Customer convenience ................................................. 23 5.3 Network effects............................................................ 24 5.4 The four layers of internet economics ......................... 24 5.5 Definitions.................................................................... 26 3 From industrial economics to digital economics II. Structure-conduct-performance................................................................................ 29 1. Performance................................................................................................................ 30 1.1 Digital vs. Non-digital goods ........................................................................... 31 1.1.1 Non-digital goods................................................................................... 31 1.1.2 Digital goods.......................................................................................... 33 1.1.3 Additional value..................................................................................... 33 1.1.4 Tradable- and non-tradable goods ......................................................... 34 1.1.5 Services.................................................................................................. 34 1.1.6 Degree of digitality ................................................................................ 35 1.2 Production and allocative efficiency................................................................ 36 1.3 Progress............................................................................................................ 37 1.4 The ‘good performance’................................................................................... 38 2. Digital market structure.............................................................................................. 39 2.1 Big is beautiful? .............................................................................................. 39 2.1.1 Economies of scale and economies of scope ......................................... 39 2.1.2 Network effects...................................................................................... 40 2.1.3 Integrational movements........................................................................ 41 2.2 Redefinition of industries and competing groups ............................................ 42 2.2.1 IT-classification ..................................................................................... 42 2.2.2 Product differentiation........................................................................... 43 2.3 Transparency.................................................................................................... 44 2.3.1 Search engines ....................................................................................... 44 2.3.2 Transparency creating patterns .............................................................. 46 2.4 Barriers of entry ............................................................................................... 46 2.4.1 Entering virtual markets......................................................................... 46 2.4.2 Making business in virtual markets ....................................................... 47 3. Conduct ...................................................................................................................... 49 3.1 Money and payment......................................................................................... 49 3.1.1 Credit cards and checks ......................................................................... 50 3.1.2 Electronic cash....................................................................................... 50 3.1.3 Micropayments ...................................................................................... 51 3.1.4 Smart cards............................................................................................. 51 3.2 Innovation ........................................................................................................ 51 3.2.1 Common understanding ......................................................................... 52 3.2.2 Pace of innovation ................................................................................. 52 3.3 Pricing behavior ............................................................................................... 55 3.3.1 Transparence.......................................................................................... 56 3.3.2 Price discrimination ............................................................................... 57 3.3.3 Online auctions ...................................................................................... 59 3.3.4 Dynamic pricing..................................................................................... 60 3.4 Behavior of firms ............................................................................................. 62 3.4.1 Inner-firm management.......................................................................... 62 3.4.2 Networking between firms..................................................................... 62 3.4.2.1 Efficiency (Marshallian economies, B2B, Collaboration)..... 62 3.4.2.2 Affiliate programs ................................................................. 64 3.4.2.3 Dis- and re-intermediation...................................................... 66 3.4.2.4 Trust........................................................................................ 69 4 CEPAL - SERIE Desarrollo productivo No 100 3.5 Product strategy and advertising...................................................................... 69 3.5.1 Production.............................................................................................. 70 3.5.2 One-to-one marketing/CRM .................................................................. 71 3.5.3 The unconditional consumer focus of internet economics.................... 73 3.6 Market equilibrium.......................................................................................... 75 3.6.1 Demand forecasting............................................................................... 75 3.6.2 Built-to-order........................................................................................
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