Funcas Social and Economic Studies

Portada publicación
Economic analysis of the digital revolution / Juan-José Ganuza and Gerard Llobert (editors)
November - 2018


Introduction / Juan-José Ganuza and Gerard Llobet

The internet and the technologies that it has spawned are behind the current digital revolution that is progressively changing our lives and the whole economy. In 2006, of the ten largest firms in the world in market capitalization eight were in the energy and financial sector. By 2016, five of the largest ten firms (including the biggest three, Apple, Alphabet and Microsoft) were in the information technology sector and only one energy

PART I PLATFORMS AND INFORMATION Digital Platforms and Compatibility. An Old Story in a New World / Juan Manuel Sánchez-Cartas

Digital platforms communicate with each other. They exchange data about their customers using common telecommunication protocols that create compatibility networks among platforms. However, the use of data is not homogeneous, some platforms freely share their data, and others sell data.

In this work, we study the role of data sharing among platforms, and how this behavior affects traditional economic insights. We describe the role of data in the new generation of digital platforms, how the old economic insights still apply in some cases and the new behaviors that are exclusive of digital platforms. Lastly, we contextualize our findings by analyzing the fitness-tracker market.

Asymmetric Information and Review Systems: The Challenge of Digital Platforms / Michelangelo Rossi

In this chapter we review theoretical and empirical works related to the issues of asymmetric information and the role of review systems in digital contexts. First, the concepts of Adverse Selection and Moral Hazard are introduced as they form the two main classes of issues related to the asymmetries of information between parties. Later, we describe the common design of review systems and discuss the empirical evidence of the impact of reviews on the performance of online users. Finally, since feedback systems can simultaneously reduce Adverse Selection and discipline Moral Hazard, we clarify the signaling and the sanctioning roles of reviews describing the theoretical mechanisms behind these functions; and the empirical findings from several digital marketplaces.

Inside the Engine Room of Digital Platforms: Reviews, Ratings, and Recommendations / Paul Belleflamme and Martin Peitz

The rise and success of digital platforms (such as Airbnb, Amazon, Booking, Expedia, Ebay, and Uber) rely, to a large extent, on their ability to address two major issues. First, to effectively facilitate transactions, platforms need to resolve the problem of trust in the implicit or explicit promises made by the counterparties; they post reviews and ratings to pursue this objective. Second, as platforms operate in marketplaces where information is abundant, they may guide their users towards the transactions that these users may have an interest in; recommender systems are meant to play this role. In this article, we elaborate on review, rating, and recommender systems. In particular, we examine how these systems generate network effects on platforms.

PART II PRICING MECHANISMS AND SEARCH Personalized Prices in the Digital Economy / Juan-José Ganuza and Gerard Llobet

Consumer information is becoming an increasingly important asset in the digital economy, allowing firms to offer targeted prices to consumers. This paper tries to shed some light on the economic trade-offs that arise when such information is obtained. We study the interplay between firms that use it for pricing purposes and consumers that want to prevent it from spreading out if they anticipate that it will be used to offer personalized and potentially higher prices. Finally, we study the emergence of data brokers, new platforms that gather and organize consumer information to sell to final market producers.

Recent Developments in Online Ad Auctions / Francesco Decarolis, Maris Goldmanis and Antonio Penta

Online advertising has been growing rapidly during the last two decades and its overall value by now exceeds that of traditional media advertisement in the US. Among the many factors behind this trend, the capacity of auction mechanisms to effectively price what advertisers’ value has played a key role in shaping the behavior of the most prominent search engine and social media companies. This essay reviews how the leading auction mechanisms for online ad sales evolved over time, illustrates how these changes can be understood through the lenses of economic theory and applies the same tools to discuss some potential future developments in online ad auctions.

Consumer Search in Digital Markets / José L. Moraga González

The way consumers search in digital markets is different from the way standard models of consumer search presuppose. Specifically, consumer search in digital markets is predominantly directed. It is directed because products and/or firms are often heterogeneous so consumer preferences do have a bearing not only on what consumers end up buying but also on the way consumers actively search through the available alternatives. More importantly, firms can affect the direction of search by changing variables that are important to consumers, notably prices. Seeking to properly understand the functioning of digital markets, the consumer search literature has recently been revamped to accommodate search that is directed. It is this new strand of the consumer search literature that I attempt to review in this chapter.

PART III NEW DIGITAL BUSINESS MODELS Crowdfunding: What do we Know? / Carlos Bellón and Pablo Ruiz-Verdú

Crowdfunding is a new form of financing that takes place through online platforms and involves the participation of a large number of contributors. Because of crowdfunding’s potential to aggregate the information dispersed among many potential consumers or investors, crowdfunding is regarded by many as a revolutionary way of financing new ventures. At the same time, crowdfunding is touted as a way to democratize investment in entrepreneurial firms, which regulation has kept mostly outside the reach of small investors. In this article we survey the role that crowdfunding may play as a source of financing for entrepreneurial firms. To do so, we review the existing theoretical and empirical work on crowdfunding and discuss the ways in which crowdfunding differs from alternative sources of financing, such as angel investing or venture capital, and whether it may replace or complement these other financing sources. We also describe how crowdfunding has been regulated so far and identify key open questions in the regulatory debate.

Digitization and the Content Industries / Luis Aguiar and Joel Waldfogel

Over the last decade, digitization has drastically affected the content industries and the way creative products are consumed, produced, and distributed. This chapter presents empirical evidence on the effects of digitization on revenues, production, and welfare, focusing more specifically on the market for music. We discuss how technological change —despite leading to significant decreases in revenues— enabled an increase in the creation of new products, leading to substantial welfare benefits. We then turn to the evidence regarding the new business opportunities enabled by digitization and discuss how new distribution and consumption platforms like Spotify affected sales and revenues in the music industry. We finally discuss how the global nature of these platforms can affect overall consumption and production patterns in the music and the movie markets around the globe.

The Economics of the Gig Economy – with an Application to the Spanish Taxi Industry / Mateo Silos Ribas

The gig economy is one of the latest byproducts of modern technological progress. It is a process of disruptive innovation that is transforming markets and society as a whole. This article reviews the economics of the gig economy and explores its main economic and regulatory implications. Throughout the article, the Spanish taxi industry is used as an example of how traditional regulations are hampering the development of the gig economy and imposing substantial costs on consumers and society.

Economics of News Aggregators / Doh-Shin Jeon

The success of news aggregators has generated a heated debate about whether news aggregators steal traffic from newspapers or increase traffic to newspapers. This survey article provides an overview of recent articles on news aggregators. After providing a simple theoretical framework, I first review empirical articles and then theoretical ones. While the empirical articles try to assess the effects on traffic to newspapers, the theoretical ones go beyond and try to analyze the effects on newspapers’ incentive to invest in quality journalism. I conclude by raising some questions for future research.

PART IV NEW TECHNOLOGIES Machine Learning for Economics and Policy / Stephen Hansen

This chapter focuses on applications of machine learning algorithms for economic research and policymaking. It first introduces basic concepts in machine learning, whose main branches include supervised and unsupervised learning. The second half of the chapter discusses use cases and applications of machine learning algorithms. First, it discusses the quantification of unstructured data and how to recover information in a way that is useful for economists. The second application concerns new possibilities for measurement, where the combination of machine learning and new digital data, provides the opportunity to develop measures of objects like inflation and economic activity. The last two applications are related to forecasting and causal inference. The overall message of the chapter is that machine learning provides the tools needed to fully exploit the possibilities of rich new digital data sources.

Bitcoin: A Revolution? / Guillaume Haeringer and Hanna Halaburda

Today more and more people talk about Bitcoin, cryptocurrencies, blockchain, or smart contracts, and many predict that these technologies will revolutionize our lives. But the apparent complexity of Bitcoin and its related technology makes it hard to participate to the debate. The purpose of this chapter is to offer a non-technical description of this new phenomenon, giving answers to many common questions (e.g., the electricity consumption of Bitcoin, or the necessity of “wasteful” mining) and debunking some of the myths surrounding Bitcoin and the blockchain technology (e.g., that it is 100% tamper proof).

Big Data and Competition Policy / Adina Claici

This chapter reviews the main issues raised by competition policy enforcement in relation to big data. The exponential increase in the amount of data available in our society as well as the unprecedented development of technologies to collect, process, store and use that data spurred numerous questions in many areas. We focus on the competition field and aim at providing a balanced overview of different opinions regarding the degree of market power conferred by big data. Due to the multitude of business models adopted by different data-driven firms and the circumstances in which data is used, it is not possible to drive general conclusions as regards the characteristics that make big data more or less valuable as an asset. On the one hand, some academics and competition enforcers have identified certain theories of harm and potential anti-competitive effects stemming from the use of big data. On the other hand, big data and the associated technologies provide consumers with new products and innovative services. In essence, this debate is just a new version of the old question on how to protect competition without stifling innovation. Finally, we present a few landmark cases that have certain, albeit still limited relevance in the discussion about big data.