Program : Business Studies Course Title : Digitalisation and New Market Paradigms

1. Program: Business Studies Course Title: Digitalisation and New Market Paradigms Course Code: MAMA311 Total Credits: 1.5 Total lecture Hours: 7.5 Course Lecturer: Uwem Essia

2. COURSE OVERVIEW AND OUTLINE Course Description • The students are taught how digitalization is changing the way business is done. • The new market possibilities created in the digital economy are explained. • How the structure, conduct and performance of firms are affected by digitalization is discussed. • The new microeconomics of competition explained. • Imperatives of the new economy for corporate and macroeconomic policies are discussed.

3. COURSE OVERVIEW AND OUTLINE Pedagogic Goal • The students’ capacity to carry out marketing activities in the new markets is improved. Pedagogic Objectives • The students understand how digitalization has changed the way business is done. • The students understand how marketing is affected by the Internet. • The student appreciates the implication of digitalization for macroeconomic policies and overall development programming.

4. COURSE OVERVIEW AND OUTLINE Learning Objectives • The students can differentiate the digital economy from the ‘brick and mortar’ economy. • The students can explain the paradigm shifts in marketing occasioned by digitalization. • The student is able to link changes in the digital economy to macroeconomic and global development.

5. COURSE OVERVIEW AND OUTLINE Learning Outcomes • The students are able to function better in the digital economy. • The students are able to undertake researches in digital marketing related areas in line with global best standards. Course Outline • Content • Section 1: From Industrial to Digital Economy • 1.1. New basic conditions • 1.2. The positive loop effect of knowledge creation • 1.3. The knowledge worker • 1.4. The Internet as a converging force • 1.5. Layers of the Internet Economy

6. COURSE OVERVIEW AND OUTLINE Session 2: Structure-Conduct-Performance 2.1: Performance in the Digital Economy 2.2. Production and allocation efficiency 2.3: Digital Market Structure 2.3.1. Redefining industries and competing groups 2.3.2. Barriers of entry to online trading 2.3.3. Drop-out rate of business startups 2.3.4. Frictions in the electronic and conventional 2.3.5. Transparency of virtual markets. 2.3.6. Economies of enterprise size in the Internet world 2.3.7. Market structures in virtual markets

7. COURSE OVERVIEW AND OUTLINE 2.4. Conduct Of The Digital Economy 2.4.1. Competitive strategy in the digital economy 2.4.2. Money and payment 2.4.3. Innovation Session 3: Pricing Behavior Session 4: Behavior of Firms 4.1. Connectivity And Firm Behavior 4.2. Dis- and re-intermediation Session 5: Product Strategy and Advertising

8. COURSE OVERVIEW AND OUTLINE Session 6: Other Firm–level Characteristics 6.1. Company finance and the growth of firms 6.2. Legal tactics 6.3. Standards Session 7: Macroeconomics of Spillovers 7.1. Role of Government 7.2. Need for Supranational moderation Session 8: The Digital Economy and Economic Growth 8.1. Digital divide and the catch up 8.2. Skill requirements

9. 1: From Industrial to Digital Economy 1.1. New basic conditions • Recent ICT explosion has moved world from the ‘brick and mortar’ industrial age to the digital era. • The Internet has changed the basic conditions significantly. • It is still debated how productive the internet has really been – the so-called ‘productivity paradox’. • On the one hand, it is argued that ICT has positive impact on productivity,. • On the other hand, the re-organization necessitated by ICT adoption creates a huge cost.

10. 1: From Industrial to Digital Economy ..1 1.1. New basic conditions • Moreover, it takes many years for the payoffs from the IT revolution to manifest. • But the Internet evolution has already created the “information society”. • And theories of the old economy that are based on the traditional factors of production (land, capital, labor) need re-examination. • Nowadays, intellectual, creative, and innovative capital (basically knowledge) drive development. • The basis for comparative advantage has changed: hence the paradigm shifts.

11. 1: From Industrial to Digital Economy ..2 1.2. The positive loop effect of knowledge creation • The first type of knowledge dominating the digital society is imaginary or creative knowledge: • Presentation skills is an example of imaginary skills. • Team building is an example of creative knowledge. • The second type of knowledge is practical knowledge that is based on data and information. • Mastery of algebra is practical knowledge – once internalized the student can apply the new knowledge to physics, chemistry or economics. • This is necessary where knowledge is needed to obtain and to use (adoption requirements) knowledge.

12. 1: From Industrial to Digital Economy ..3 1.2. The positive loop effect of knowledge creation • The vast cyberspace warehouses data and its network effect increases interactive data exchange exponentially. • This positive loop effect of knowledge creation is highly accelerated. • Computers have increased the ‘brain power’ of humankind magnificently. • So too are interconnectivityof computers and people via the Internet.

13. 1: From Industrial to Digital Economy ..4 1.2. The positive loop effect of knowledge creation • The generation, processing and distribution of knowledge and information drive productivity. • All firms need ICT to be on the competitive technological frontier. • Thanks to the Internet, Knowledge is almost non-rival and non-excludable: • Knowledge cannot be kept secret for any possible long period; • the new economy is characterized by uncontrollable spillovers and externalities • It is now important that experts conceptualize how knowledge and information can best be modeled.

14. 1: From Industrial to Digital Economy ..5 1.3. The knowledge worker • The knowledge society requires a ‘knowledgeable worker’ with up-to-date competencies. • Workers need to renew their skills through “life-long learning” and “on-the-job-training”. • The Internet or virtual space is increasingly an important part of human life. • It is also the dominant medium to create, transmit and share information and ideas. • Nearly everyone is compelled to "think network", and live through the liberalized sea of information flow.

15. 1: From Industrial to Digital Economy ..6 1.3. The knowledge worker • However, many fear that the cyberspace may someday collapse due to information overload. • The volume and speed of flow of information has been very high. • Many now focus just on synthesizing information already provided. • Much less time is available for analyzing coherences and creating new information.

16. 1: From Industrial to Digital Economy ..7 1.4. The Internet as a converging force • The Internet engulfs all aspects of economic, political, social-cultural and moral life. • Knowledge is converging. It is now more difficult to separate professions and specialties. • It not only loss of distance, but also loss of space. knowledge knows no territorial boundaries. • Individuals, firms, and countries are now under immense pressure to be global players. • Measures of performance for the industrial age have become ill equipped for the new economy.

17. 1: From Industrial to Digital Economy ..8 1.4. The Internet as a converging force • This is particularly so because network or global effect are difficult to contextualize and measure. • Network externalities exist because the utility from being connected increases when more persons are connected. • Subscription to the network is more valuable as the network is oversubscribed.

18. 1: From Industrial to Digital Economy ..9 1.5. Layers of the Internet Economy The Internet economy can be divided into four layers, namely; Infrastructure Layer, Application Layer, Intermediary Layer, and Commerce Layer • Infrastructure Layer – players in this layer provide the hard infrastructure e.g., backbone providers and Internet service providers, and manufacturers. • Application Layer – players in this layer build upon the infrastructure provided. They include, Internet consultants, and web/software developers, etc. • Intermediary Layer – players in this layer facilitate the meeting and interaction of buyers and sellers over the Internet. These include: online travel agents and brokers, content aggregators, portals/content providers and online advertising,

19. 1: From Industrial to Digital Economy ..10 1.5. Layers of the Internet Economy • Commerce Layer– players in this layer sell products and services to consumers or businesses over the Internet. These include e-tailers, manufacturers selling online, airlines selling online tickets, and online entertainment and professional services. • Note that many companies are players at multiple layers. • For instance, Microsoft and IBM are important players at the Internet infrastructure, applications, and Internet commerce layers.

20. Review Questions • Explain how the IT revolution has created new basic conditions. • Explain why imaginary skills, creative knowledge and practical knowledge are relevant in the digital economy. • The internet has rendered the knowledge non-rival and non-excludable. Discuss. • Do you agree with the view that the “knowledgeable worker” needs to renew skills through lifelong learning • In what ways is the internet a converging force?

21. Session 2: Structure-Conduct-Performance 2.1: Performance in the Digital Economy • In the new economy, the frontiers for goods and services have melted down to “digital- or non digital” goods. • Digital goods can bypass transportation costs, and quite often the wholesale and retail networks. • They are non-rival, for example, most web users go online to get news and information, and every big newspaper or magazine, and TV stations have valid web addresses. • Digitalized goods are pulled by the demand of the customer, and pushed by the supplier. • Digital products have high fixed cost and low marginal cost; • For example, information is expensive to produce, but cheap to reproduce.

22. 2: Structure-Conduct-Performance ..1 2.1: Performance in the Digital Economy • Digital goods are not generally governed by the conventional economic notions of scarcity and increasing marginal cost. • The Internet is blurring traditional description of tradable and non-tradable goods. • It is now possible to trade more goods and services. • Any activity that can be conducted via a screen and telephone can be carried out anywhere in the world. • Some goods, like food, may never become digitalized. • Goods like software are very susceptible to digitalization and hardly get distributed physically anymore.

23. 2: Structure-conduct-performance ..2 2.2. Production and allocation efficiency • Competitiveness of the virtual markets checks misallocation of resources. • Interactivity of Internet has eased adjustment of prices. • A modern capital market demonstrates how the new economy can be efficient. • The digital economy aligns demand to supply more intimately. • Markets and industries are getting destroyed and created at an unprecedented speed.

24. 2: Structure-Conduct-Performance .. 3 2.2. Production and allocation efficiency • Today's businesses and consumers demand more customized set of products and services. • Firms in the same industry compete and at the same time collaborate to develop knowledge. • Digitalization encourages co-operational relationship of firms in a value chain. • The new economy defines the basic assumptions and analytical tools. • This has redefine what is meant by “good performance”.

25. 2: Structure-Conduct-Performance .. 4 2.3: Digital Market Structure • The transition from ‘brick and mortar’ to the digital economy raises a number of questions: • What is the structure of industries and competing groups? • Has barrier to entry changed with online trading? • How is the drop-out rate of startups in the emerging markets? • Do electronic markets have less friction than conventional markets? • How transparency are virtual markets'? • Does the firm size matter in the virtual market? • Does the textbook model of perfect competition apply in virtual markets?

26. 2: Structure-Conduct-Performance .. 5 2.3: Digital Market Structure 2.3.1. Redefining industries and competing groups • Openness of the virtual markets to customers has accelerated competition. • In considering ‘economies of scale’, the concern now is with ‘scope’ instead of ‘size’. • Firms reduce cost with multiple products instead of producing more of one product. • The unit costs are lower when complementary products are produced by a single firm. • The synergy created from complementarities are the 'cross product' and 'cross-learning effects'. • In the old economy the focus of a firm was on maintaining and improving the actual business.

27. 2: Structure-Conduct-Performance .. 6 2.3: Digital Market Structure 2.3.1. Redefining industries and competing groups • In the new economy the preoccupation is to continuously initiate new, innovating businesses. • The old firm focused on maintaining and improving the actual business. • But the new firm is to continuously initiating new, innovating, businesses. • The new economy is dominated by ‘unconditional consumer focus’, and product individualization. • This has redefined industries and competing groups. • Measurement systems of the old economy are ill-equipped for the digital economy.

28. 2.3. Digital Market Structure 2.3.2. Barriers of entry to online trading • The new economy has made entry and exit much easier. • Since no firm is able to control the value chain, new firms are often set up virtually overnight. • Outsourcing eases the entry of new business ideas into a market niche (of a value chain). • New ideas and enterprises often do not need need to spend much on fixed cost spending. • Marketing is eased by online ordering. • The “death of distance” kills many market entry inhibitions of spatial economics.

29. 2.3. Digital Market Structure 2.3.2. Barriers of entry to online trading • The worldwide-Web is cutting through many of the distribution and market barriers. • Local firms are increasingly gaining access to foreign markets. • This is extremely beneficial for small and medium-sized firms. • Barriers of entry to global markets, especially in the supply chain, procurement and outsourcing have now almost vanished.

30. 2.3: Digital Market Structure ..2 2.3.2. Barriers of entry to online trading • The internet cuts through distribution and market barriers that limits access to foreign markets. • This is has been quite beneficial for small and medium-sized firms. • However, the network effects and economies of scope favor the established firms. • This has raised some entry barriers for the e-commerce newcomers.

31. 2.3: Digital Market Structure ..3 2.3.3. Drop-out rate of business startups • While entry may be easy, growth and survival of businesses constitute the major challenge. • Barriers to entry may be low, but the issues is whether it makes sense to enter in the first place. • The key ingredient for success is creating the “economies of reputation“. • Making a name is paramount in virtual markets.

32. 2.3: Digital Market Structure .. 4 2.3.4. Frictions in the electronic and conventional markets • The ‘network effect’ eases getting several items from a source, rather than from several sources. • It is now easier for many firms to buy components of products instead of producing everything. • Outsourcing is now commonplace in the digital economy. • Increasingly, firms sell diversified but related products and services.

33. 2.3: Digital Market Structure .. 5 2.3.4. Frictions in the electronic and conventional markets • For example, an online book retailer can as well sell air tickets. • The driving force here is the economies of scope. • A waste disposing firm can produce organic manures, and at the same time cultivate vegetables. • Closeness to the consumers makes it easier to better decipher the demand • It also helps to tailor production to the single customer.

34. 2.3: Digital Market Structure … 6 2.3.5. Transparency of virtual markets. • The e-economy can be called a ‘nude economy’ due high transparency of the Internet. • It is possible to search for any thing on the internet. • The ease that can be gathered, analyzed and interpreted has simplified marketing research. • The high level of mutual transparency makes it difficult for consumers to be deceived. • Consumers easily identify how to make some gains, and producers know their customers quite well.

35. 2.3: Digital Market Structure ..7 2.3.6. Economies of enterprise size in the Internet world • The vast opportunities to enter the value chain create key roles for the small innovating firms. • Smaller firms can easily supply components for larger firms. • But larger firms have goodwill and scope to diversify much faster than small firms. • Consumers and down line firms prefer to buy variety of items from one source, rather than from several sources.

36. 2.3: Digital Market Structure ..8 2.3.7. Market structures in virtual markets • Modern ICT enables the creation of a better and clearer view of the market. • It may seem that the virtual market indeed approximates perfect competition in several ways. • Buyers and sellers generally have access to the same kind of information • Leading to high mutual knowledge between consumer and producer. • This approximates the perfect availability of information assumed in perfect competition.

37. 2.4. Conduct Of The Digital Economy 2.4.1. Competitive strategy in the digital economy • Generally, the e-economy tend to approximate the textbook model of perfect competition. • But the threat of entry depends on the industry and on the final goal of the business. • In reality it is much easier for a large firm to ‘cross-enter‘ a new market. • For example, it is easier for a big car importer to also sell computers and its accessories. • A car retailer can as well offer information processing tools.

38. 2.4: Conduct Of The Digital Economy ..1 2.4.1. Competitive strategy in the digital economy • Economies of scope make big firms able to enter almost every market. • The e-economy has weakened customer loyalty as it is very easy to switch to competitors. • Price competition has become intensified, due to high level of transparence. • Price discrimination becomes extremely difficult. • Firms are compelled to satisfy the consumer by every means possible.

39. 2.4: Conduct Of The Digital Economy ..2 2.4.1. Competitive strategy in the digital economy • Costumer’s trust has become increasingly difficult to get and retain. • The firms need to do more quality inducing advertisement. • Geographical factors are no longer the bases for competitive advantages. • The consumer profits from sticking to one company that already knows him well. • The high mutual knowledge between buyer and seller is the basis for costumer loyalty.

40. 2.4: Conduct Of The Digital Economy ..3 2.4.1. Competitive strategy in the digital economy • Firms in an industry produce substitute products continually. • Competition is excessive in the Information-based firms. • It is also the case with the music industries, banking and other intermediary functions. • Knowledge creation has improved performance significantly. • Buyers compete by forcing down prices and bargaining for higher quality or more services.

41. 2.4: Conduct Of The Digital Economy ..4 2.4.1. Competitive strategy in the digital economy • Some buyers also play competitors against each other as they seek more favorable prices. • Consumer sovereignty has compelled firms to collaborate and compete at the same time. • Suppliers are compelled to trust each other. But infomediaries are replacing traditional ties. • Suppliers bargaining power is decreasing. • The high transparency introduced by B2B practices is at the heart of network relationships.

42. 2.4: Conduct Of The Digital Economy ..5 2.4.2. Money and payment • A sound Internet payment system requires security, reliability, scalability, anonymity, acceptability, customer base, flexibility, convertibility, efficiency, ease of integration with applications, and ease of use • Security: the infrastructure supporting electronic commerce must be usable and resistant to attack. • Reliability: the infrastructure must be highly available and should avoid any form of failure. • Scalability: The payment infrastructure must support multiple servers, distributed across the network.

43. 2.4: Conduct Of The Digital Economy ..6 2.4.2. Money and payment • Anonymity : the identity of the parties to the transaction should be protected. Tracking a transaction should be made highly expensive and difficult. • Acceptability:the e-payment instrument must be accepted widely and unrestricted by time and space. • Customer base: the customer base should be vast and well spread for wider acceptability. • Flexibility: the payment mechanism should support several payment methods and instruments that should be integrated into a common framework.

44. 2.4: Conduct Of The Digital Economy ..7 2.4.2. Money and payment • Convertibility- it should be possible and easy to move funds from one instrument and currency to another. • Efficiency: the cost per transaction of using the infrastructure must be insignificant. • Ease of integration: the payment system should be pliable to upgrading and modifications. • Ease of use: most payments should occur automatically, and users should be able to monitor their spending without going out of their way to do so.

45. 2.4: Conduct Of The Digital Economy ..8 2.4.3. Innovation • The traditional notion of innovation is linked to R&D, pecuniary expenses, scientific or technical expertise and procurement of equipment. • In the e-economy, innovation is linked to the conception and implementation of new ideas. • The new ideas need the scale of big companies in order to get widely accepted. • Inter-firm cooperation is important; cooperation of firms with the academia is also needful.

46. 2.4: Conduct Of The Digital Economy ..9 2.4.3. Innovation • Firms innovate faster when they can access and implement acquired knowledge rapidly. • This calls for strong link between internal innovativeness and external innovations. • Internal innovativeness eases adopting knowledge produced outside the firm. • Generally, collaborating firms are more innovative than non-collaborating ones. • Collaboration is as important for a big company, as it is for a small start-up.

47. 2.4: Conduct Of The Digital Economy ..10 2.4.3. Innovation • External economies of scale are a basic driving force in the e-economy. • Internet is the ‘big equalizer’, as all firms and individuals can work with same information. • Constantly, collaborations unconsciously develops and extends the frontier of innovativeness. • Everyone involuntarily swims through different waves of innovation at the same time. • What distinguishes firms is the ‘lead time’ of each player.

48. 2.4: Conduct Of The Digital Economy …11 2.4.3. Innovation • It is not necessarily ‘how good’, but ‘how fast’ a firm or consumer is. • Reward in the e-market is driven by “economies of time” or ‘first-mover-advantage’. • The cost of new technologies is reducing at a very fast rate: • For example, a laptop made in 2014 will cost far less than its 1975 model, and as well have much higher processing power.

49. Review Questions • Digital goods are generally not governed by the conventional economic notions of scarcity. Discuss • Explain the destructive creation powers of the internet economy. • Explain how digitalization has changed the structure of the market economy. • Explain the economies of goodwill and scope in the digital economy. • Explain how the new economy has made corporation of enterprises with researchers and the academia very important.

50. Session 3: Pricing Behavior • Prices in the e-markets are falling in the long run for the average consumer. • But the cost of e-purchase should be higher that at a physical ‘take-away’ store. • Global openness and transparence of e-markets is making it more difficult to discriminate in prices. • The different types of discrimination are as follows: • First-degree price discrimination: also known as perfect price discrimination. The seller charges a different price for each unit of the good based on the costumer’s maximum willingness-to-pay for that unit.