Digitization refers to the process of converting analog information into digital form, which can be stored, processed, and transmitted electronically. Digitization has had a profound impact on the marketplace, enabling the development of new technologies and platforms that have transformed the way that businesses operate and interact with customers. Moreover, digital transformation also changed marketing research by demanding technical skills1.
Some specific ways in which digitization has affected the marketplace include:
- E-commerce: Digitization has enabled the development of online marketplaces and retail stores, allowing businesses to sell products and services directly to consumers through the internet. This has made it easier for businesses to reach a global market and has created new opportunities for entrepreneurs.
- Digital payments: Digitization has also enabled the development of electronic payment systems, such as credit cards and mobile payments, which have made it easier for businesses to accept payments and for consumers to make purchases.
- Data analytics: Digitization has generated vast amounts of data, which can be analyzed using big data analytics tools to gain insights into consumer behavior and market trends. This has allowed businesses to make more informed decisions about their products and marketing strategies.
- Collaboration and communication: Digitization has also made it easier for businesses to collaborate and communicate with each other and with customers through digital channels, such as email, messaging apps, and video conferencing. This has made it easier for businesses to work together and has created new opportunities for remote work and collaboration.
Overall, digitization has had a major impact on the marketplace, creating new opportunities and challenges for businesses and consumers alike.
Theoretical assignment I (5 points)
Read the article The changing role of the marketing researcher in the age of digital technology: Practitioner perspectives on the digitization of marketing research
- What is the difference between viral and network effects?
Big data & Social media #
Big data and social media have had a significant impact on digital markets in a number of ways.
Big data refers to the vast amounts of data that are generated by the digital activities of consumers and businesses. This data can be analyzed using big data analytics tools to gain insights into consumer behavior, market trends, and other factors that can help businesses make more informed decisions about their products, marketing strategies, and operations.
Social media platforms, such as Facebook, Twitter, and Instagram, have also had a major impact on digital markets, as they have enabled businesses to reach and engage with customers in new ways. Social media can be used to promote products, build brand awareness, and gather customer feedback, among other things. Additionally, social media can serve as a powerful marketing tool, as it allows businesses to target specific segments of the market and to track the effectiveness of their efforts in real-time.
Overall, big data and social media have had a major impact on digital markets, enabling businesses to gain insights into consumer behavior and to reach and engage with customers in new ways.
Economic Costs in a Digital Environment #
Search costs #
Consumer search costs refer to the time, effort, and resources that consumers must expend in order to find the products or services that they are looking for. Digitization has had a significant impact on consumer search costs, as it has made it easier for consumers to access information about products and services and to compare prices and options.
In the digital age, consumers can easily search for products and services online using search engines, online marketplaces, and other platforms. This allows them to quickly access a wealth of information about different products and compare prices, features, and reviews from multiple sources. As a result, consumer search costs have been greatly reduced, making it easier for consumers to find the products and services that they are looking for.
However, digitization has also introduced new forms of search costs, such as the time and effort required to filter through large amounts of information, or the risk of encountering fraudulent or misleading information online. To address these challenges, consumers may need to invest more time and effort in evaluating the quality and reliability of the information they access online.
Overall, digitization has greatly reduced consumer search costs, but it has also introduced new challenges that consumers must navigate in order to find the products and services that best meet their needs.
Marginal costs #
Marginal costs refer to the incremental costs that a company incurs when it produces one additional unit of a product or service. In a digital environment, the marginal costs of producing and distributing products and services can be significantly lower than in the physical world, due to the reduced costs of storing and distributing digital products, and the ability to scale production and distribution quickly and easily.
In the digital age, companies can produce and distribute digital products, such as software, music, and video, at a very low cost, as there are no physical materials or transportation costs involved. Additionally, companies can use cloud computing and other technologies to scale their operations quickly and efficiently, without incurring the same costs as in a physical environment.
However, it is important to note that the marginal costs of producing and distributing physical goods in the digital marketplace may still be significant, as there are still costs associated with manufacturing, packaging, and shipping. Additionally, there may be other costs associated with operating in the digital environment, such as the costs of maintaining websites and online platforms, and the costs of cybersecurity and data protection.
Overall, digitization has the potential to significantly reduce marginal costs for companies, but it is important for businesses to carefully consider all of the costs associated with operating in the digital environment in order to maximize efficiency and profitability.
Assortment sizes and the “Long tail” #
In the offline world, inventory (or assorment) sizes are limited. Moreover, on the one hand, bigger assortments may increase sales by expanding choice (options, colors, etc.). On the other hand, it may encourage customers to continue their search2. Consequently, in an offline-world, the effect of a more extensive inventory depends on the already provided products and those added. Increased product variety made available through electornic markets can be a large source of consumper surplus gains3. A study estimated that the increased product variety of online bookstores enhanced consumer welfare by $731 million to $1.03 billion in the year 20003.
The long tail refers to the phenomenon in which a large number of niche products or services collectively make up a significant portion of a market’s overall sales. In traditional brick-and-mortar retail, the long tail was often difficult to tap into, as the cost of carrying a large number of niche products was often prohibitively high. However, in the digital marketplace, the long tail has become much more accessible, as the low marginal costs of storing and distributing digital products and the ability to reach a global market have made it easier for businesses to profit from niche products and services.
The long tail is often associated with the rise of the internet and the proliferation of e-commerce platforms, which have made it easier for businesses to reach a global market and for consumers to access a wide range of products and services. It has also been facilitated by the development of new technologies, such as search engines and online marketplaces, which have made it easier for consumers to discover and purchase niche products and services.
Overall, the long tail represents a significant opportunity for businesses to profit from niche products and services, and has been a major factor in the growth and evolution of the digital marketplace.
Recommendation and customization #
Recommendation and customization are important strategies in the digital marketplace, as they allow businesses to personalize the customer experience and increase customer engagement and loyalty.
Recommendation systems use data about a customer’s past purchases, browsing history, and other interactions to suggest additional products or services that the customer might be interested in. These recommendations can be made through a variety of channels, such as email, website banners, or in-app notifications. Recommendation systems can help businesses increase sales and customer loyalty by providing a more personalized and relevant experience for customers.
Customization refers to the ability for customers to tailor products or services to meet their specific needs and preferences. In the digital marketplace, customization can take many forms, such as allowing customers to select specific features or options, or to create their own custom products. Customization can help businesses differentiate their products and increase customer satisfaction, as it allows customers to create products that meet their specific needs and preferences.
Overall, recommendation and customization are important strategies in the digital marketplace, as they allow businesses to personalize the customer experience and increase customer engagement and loyalty.
References & Further Reading #
- Goldfarb, A., & Tucker, C. (2019). Digital economics. Journal of Economic Literature, 57(1), 3-43.
- Agrawal, A., Gans, J., & Goldfarb, A. (2018). Prediction machines: the simple economics of artificial intelligence. Harvard Business Press.
- Elmaghraby, W., & Keskinocak, P. (2003). Dynamic pricing in the presence of inventory considerations: Research overview, current practices, and future directions. Management science, 49(10), 1287-1309.
Cluley, R., Green, W., & Owen, R. (2020). The changing role of the marketing researcher in the age of digital technology: Practitioner perspectives on the digitization of marketing research. International Journal of Market Research, 62(1), 27-42. ↩︎
Cachon, G. P., Gallino, S., & Olivares, M. (2019). Does adding inventory increase sales? Evidence of a scarcity effect in US automobile dealerships. Management Science, 65(4), 1469-1485. ↩︎
Brynjolfsson, E., Hu, Y., & Smith, M. D. (2003). Consumer surplus in the digital economy: Estimating the value of increased product variety at online booksellers. Management science, 49(11), 1580-1596. ↩︎ ↩︎