2.1.4 How the digital economy affects markets and firms


    E-business – any process using a digital network

    E-commerce – buying and selling goods and services online

    Features of the digital economy

    • Use of social media for business purposes
    • Easy access to buyers and sellers across the globe
    • There is structural change, as when demand is rising new entrants will join the market and when demand falls, producers leave the market
    • Creative destruction as new products replace outdated ones


    Price comparison sites help consumers, as it makes perfect information achievable. it gives consumers now have more power to find the best deal more quickly. Prior to this, asymmetric information was more likely to be a problem, as sellers could mislead customers into paying higher prices, or buying damaged products. Consumers now know what else is available on the market and whether they are getting the best deal or not.

    Viral marketing – a marketing method where firms cause viewers of a promotion to share it with friends by text, social media and email (therefore spreading product awareness).


    Viral marketing not only spreads awareness of a product and a brand, it can increase sales with less effort and expense for the firm in question. It creates a campaign for the business as others are spreading the advert for them, an example of this might be John Lewis Christmas advert which is very well known and anticipated, or gimmicks such as the Ice Bucket Challenge which raised awareness of ALS.


    As well as this, the digital economy means that companies can stay active and in contact with customers. Platforms such as Facebook and Twitter allow businesses to promote their brans and get customer feedback. Online communities share information, ideas, personal messages, images and videos which has transformed business methods. Internet Advertising UK states that almost 80% of consumers are more likely to buy certain brands due to their social media presence.



    Most markets do not need to supply everyone, they are likely to be interested in a certain subset of consumers. This means that in the digital economy, undifferentiated strategies such as mass-marketing are not used.


    Micromarketing – the marketing of products and services is focussed on a small section of the market (often through social media). This is highly personalised and can include special offers and voucher codes, which are aimed towards individuals.


    They focus on a small section of the market as supplier target highly specific customers. They can gain customer information through devices such as cookies, which allows them target customers with similar tastes to those who like their product. They can also target ‘friends’ of customers as they are likely to have similar tastes. An example of this would be Amazon using previous purchases and browsing history to recommend other products to individual consumers. Twitter especially can be useful as tags allow people to post on a common theme, so businesses can see what users of their product like and perhaps use this for further product development.


    How can they do this?

    • Browsing history
    • Supermarket loyalty cards
    • Social media apps


    Why do they target customers?

    • Saves time
    • Higher likelihood of a sale
    • Collect data on customers


    It also makes recruitment easier as employers can use sites such as LinkedIn to find candidates that have valuable skills/experience and are suitable for available jobs.


    Online retailing and online distribution

    Examples of online retailing are businesses such as Amazon, eBay and ASOS. These sites cut out the middle man, with products going directly from supplier to customer, with no seller in between.


    This means that:

    • Business start-ups are faster and cheaper, with no need for physical premises and staff to work on this premises.
    • The order process is standardised which makes it simpler
    • Data on consumer spending can be collated more easily


    Warehouses that process online orders are known as ‘Dark Stores’. An alternative to this are stores that have both a physical premises and online counterpart, such as HMV which offers online orders through it’s website, or M&S which has the option to order online and collect in store which is known as ‘Bricks and Clicks’.


    This creates demand for workers with digital skills which has the following effects:

    • Rapid expansion of an ICT trained workforce needed (shortage of labour)
    • Older workers less comfortable with digital technology
    • Job losses in traditional retailing
    • Shift in employment patterns



    The long tail is the main idea exploited in the digital economy. This entails stocking a large number of different niche products rather than a small variety of the ‘hits’ (mainstream products). As customer needs/wants are diverse, firms will sell smaller quantities of each niche product.

    The former is equivalent to selling the latter, but niche products have a longer life cycle as mainstream products change regularly and in the digital market, there is less risk of unsold stock.

    As warehouse storage costs are low, big online suppliers can stock a large range of products including those for a niche market. This is not possible otherwise as storage and distribution costs are higher, so firms can only afford to stock popular products which guarantee sales. Businesses are no longer restricted by the physical space available in a shop or the costs associated with this.

    Consumers get a wider variety of choice and followers of niche markets can access exactly what they want which creates greater customer loyalty. As customer needs/wants are diverse, firms will sell smaller quantities of each niche product but gain greater revenue from the wider variety sold.

    Wider geographical markets

    The natural pattern of demand is extremely diverse and in all markets there are more niches than hits, the internet enables customers to find niche products more easily, as they are not limited to their

    Businesses have developed wider geographical markets as online access makes it possible to gather customers worldwide. Smaller businesses can have a global reach and location is much less significant than prior to the development of the digital economy.


    Impact on costs, prices, profit and loss

    The costs for firms will be reduced as they will have lower fixed costs and also have be likely to benefit from economies of scale, mainly production and distribution through technological advances. Their prices will likely be lower, as they have these lower costs but also there may be price competition between rivals. Their profits are likely to increase as their lower average costs increase their profit margins. It has allowed more firms to become more profitable, as more opportunities are available but other have faced losses as they are unable to face the new competition.

    Impact on firm destruction and creation

    There are lower barriers to entry, due to the lack of fixed costs, which makes the market contestable and heightens the likelihood of new firms in the market. However due to the many competitors in the market, innovation is required to survive which many firms cannot afford. Older, more traditional brands such as Blockbuster have died out as well due to the creative destruction that has been accelerated because of the digital economy.

    Flexible working hours and workers can also work from home which creates a greater supply of labour who are more motivated More intense competition as there are lower barriers to entry so more firms will enter the market
    Likelihood of communication mistakes is increased Competition encourages innovation, as firms are under pressure to differentiate products from rivals
    Quicker business (placing orders/deliveries)
    Less conflict between workers Innovation is encouraged, as firms are under pressure to differentiate products from rivals
    Easier communication with suppliers and employees Cheaper prices due to the saturation of the market and availability of substitutes
    Time efficiency savings Less oligopolistic behaviour as there are many firms with small amount of market share
    Global markets opened up for smaller firms
    Economies of scale more likely Shorter product life cycles (creative destruction)
    Reduced fixed costs as no need for physical premises Many businesses fail within six months of starting up – difficult to survive in competitive market


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