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Digital Platforms Primer: How Digitization has Changed Platform Businesses and the Economy (Part 2)

As large tech companies face increasing antitrust scrutiny, it is hard not to notice how digitization has permeated much of our lives. Shopping, professional networking, and matchmaking services are all activities that have become common on digital platforms and the internet. This blog is the second in a multi-part series on digital platforms. The first blog explained the platform business model, while this one will look at digitization and its effects, aiming to help readers understand how digitization has changed platform businesses and markets. Later blogs in this series will explore digitization further through the lens of competition and public policy.

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Digitization

Digitization refers to the process of converting information into a machine-readable format and has allowed people and organizations to collect and store more granular data than ever before. Digitization enables technologies such as online streaming services and search engines. Over the past several decades, the cost of data storage has plummeted and the amount of data generated has grown rapidly. According to cloud storage company Backblaze, “hard drives prices have dropped from around $500,000 per gigabyte in 1981 to less than $0.03 per gigabyte [in 2017].” The World Economic Forum projected the digital universe would reach 44 zettabytes in 2020 and stated, “If this number is correct, it will mean there are 40 times more bytes than there are stars in the observable universe.”

Digitization has had considerable effects on society. Economists Avi Goldfarb and Catherine Tucker have identified lower search costs, lower replication costs, lower transportation costs, lower tracking costs, and lower verification costs as five major ways the economy has changed as a result of digitization.

  1. Lower search costs: Digitization has made it less costly to look for things. For instance, the internet makes it easier to find different products and services.
  2. Lower replication costs: Digitization has made the cost of replicating certain items incredibly cheap. For example, once developed, the marginal cost of producing additional copies of an app is virtually zero.
  3. Lower transportation costs: The cost of transporting digital goods is effectively zero in most cases. For instance, once the infrastructure is in place, sending email messages to people costs little more than the electricity needed to do so.
  4. Lower tracking costs: Digitization has made tracking people and items much cheaper. For instance, tracking a package purchased online as it makes its way from the warehouse to your front door.
  5. Lower verification costs: Digitization has made verifying things easier. For instance, a smartphone can use a person’s fingerprints to verify their identity quickly.

These trends have many benefits but also raise policy challenges and concerns. For instance, lower tracking costs can help an app track users’ activity to tailor its services, but it can also create privacy concerns for its users. They also have implications for platform businesses, which will be discussed in the next section.

How has digitization affected platforms?

“Digital platforms” are the combination of the platform business model and digitization. Digitization has had two major impacts on platform businesses:

  1. Digitization has allowed platforms to grow quickly and at a relatively lower cost. Lower replication and transportation costs have made it easier to add new users and other external parties, sell goods and services, and generate content. For instance, an app maker for games can quickly replicate and transport their apps to end-users relative to when they had to create multiple videogame cartridges then ship them to a retailer. Lower search costs have made it easier for digital platforms to match external parties on their platform, facilitating interactions on the platform. For instance, a professional networking site can more easily match recruiters and jobseekers relative to more traditional methods, such as classified ads.
  2. Digitization has helped platforms gather, store, and use massive amounts of data. Digitization, and especially lower tracking costs, has made collecting, storing, and using huge amounts of data by platform businesses easier. A digital platform can use this data for various purposes, such as identifying trends, customizing products, and detecting problems on the platform. For example, a company might suggest products based on previous purchases, or a professional networking site may identify a surge in layoffs among electrical engineers and use this information to design a training program on how electrical engineers can transition to professions that utilize their skillsets. This data’s collection, storage, and use bring questions about data accuracy, consumer protection, privacy, security, and competition.

Combining these two factors and network effects (explained in the previous blog) has allowed some digital platforms to become incredibly large relative to most companies.

Key digital tools and practices

Digitization has enabled a few essential tools and practices worth highlighting since they have impacted digital platforms and competition in digital markets.

  • Interoperability: Interoperability refers to when digital systems can regularly interact and share information with each other in real-time. Digital platforms can leverage existing APIs (application programming interfaces) to interoperate with other digital systems to supplement their products and services. For instance, ridesharing apps can quickly adopt a digital mapping service created by another digital platform to help track real-time traffic. Interoperability can help a platform scale its product or react quickly to changing business dynamics. Interoperability raises policy questions about whether and when it should be mandated, what rules and regulations should govern it, and what effects it might have on competition.
  • Search algorithm: Search algorithms allow platforms like online marketplaces and users to sort through information and product listings to find relevant information quickly. When compared to traditional retail, for example, digital search on an e-commerce platform can dramatically reduce search costs for users who would otherwise need to go to various stores, aisles, and shelves to find the product they want. Search algorithms and the sorting of information affect how users see products and services and raise questions about how the algorithm works, what it’s prioritizing, whether it is prioritizing its own goods and services, and any effects it has on competition.
  • Recommendation systems: Recommendation systems are used to recommend products and content to users on digital platforms. For instance, a video sharing service recommending what video to watch next based on user tastes. Recommendation systems are somewhat comparable to getting advice from a retail employee about what to buy at a brick-and-mortar store. Like search algorithms, recommendation systems raise questions about how the underlying algorithm functions, what data it uses, what it is prioritizing, whether it is prioritizing its own products and content, and what effects it has on competition.
  • Online reputation systems: Online reviews and other digital tools for evaluating products and services can give users tools for evaluating external parties on a platform. Online reputation systems can be like magazine reviews or word of mouth from a neighbor in the real world. They can help firms build their brand on the platform but also raise issues, such as detecting and addressing fake online reviews.
  • Targeted advertising online: The vast amounts of data collected from digital platforms have helped make targeted advertising more prevalent. These ads can be more tailored to a specific user relative to more traditional tools for advertising, such as ads in print newspapers. Targeted advertising online creates questions about user data collection and privacy, which advertisements are shown to which people, and the competitiveness of the advertising space.

The tools and practices that digitization enables can have many benefits, but they can also raise questions and concerns worth further exploring.

Conclusion

The global economy and nature of commerce have significantly changed as the costs of information plummeted and digitization expanded. Digitization has allowed digital platforms to grow more rapidly and accumulate considerable amounts of data, while enabling many new tools and practices now embedded in digital markets. This has greatly impacted market dynamics and the competitive landscape, giving policymakers more reason to explore the issue further. The next blog in this series will examine how digitization and digital platforms have shifted the nature of competition in the economy.

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