Digital Economics 101

An econ nerd discusses economic impacts of an increasingly digital world.

Markets have been around basically as long as human societies have; evidence remains of trade and commerce from even the most ancient civilizations.[1] Given the fact that we live in an imperfect world with limited resources, time included especially, it is a law of nature that people must constantly make choices and forego opportunities. Even reading this article was an economic decision because you could have spent the couple minutes on something possibly more productive. At our most primitive stages, people had to decide whether their time was best spent hunting, searching for water, or sewing clothes to stay warm in the winter. Thankfully, our choices today have less of an effect on our immediate survival and are more in line with deciding whether guacamole is really worth the extra $1.80.

Aristotle once noted that every possession has two purposes — its functional use and its trade value.[2] Meat could be used for consumption, or traded in exchange for water/warm clothes. In free market economic theory, a good is valued at the price a buyer is willing to purchase for it. Ideally, a seller would increase or decrease the price of the good until over time they figure out the equilibrium price that generates the optimal amount of profit. A supplier’s interest in profit, although not the sole factor, is the fundamental determinant in any free market.

Ideally, at the equilibrium price the market would clear and there would be enough supply to meet demand for any given product. However, realistically markets are as imperfect as their human participants. Asymmetric information and imperfect competition are two main sources of market failure. Asymmetric information, as it sounds, is a situation when market players lack complete information about the market. For example, a consumer purchases a certain pair of running shoes for $100 without knowing another store nearby was selling the same pair for half the price. The buyer pays more than they should while the firm offering the better deal fails to make the sale, creating market inefficiency.

There are various forms of imperfect competition, but one example would be if you lived on an island with only one store that sold running shoes and the government prevented any other firms from entering the market. That store could basically charge any price and the consumer would have to accept it if they wanted a pair, assuming it was still cheaper than shipping costs. Such a situation would mean less income for consumers willing to pay the extraordinary price while excluding consumers who wanted a pair but were not willing to pay that much. The market is inefficient but the firm that is theoretically solely interested in maximizing profits is not to blame; it makes rational sense for them to set such ridiculous prices.

In my lifetime alone, the digital world has developed in ways that will permanently impact economics. Apps like Groupon allow firms to offer consumers better deals, and web browser extensions like Honey provide consumers with discount codes automatically. Companies like Amazon connect buyers to sellers at every corner of the globe, and eBay allows consumers to purchase everything from their next house to clippings of Justin Bieber’s hair (which probably cost the same).[3]

All it takes is a quick Google search for someone to basically learn everything there is to know about a product. Therefore, it has never been harder for firms to take advantage of consumers. Now consumers everywhere pay less for the same goods, have access to seemingly any good or service imaginable, and firms struggling to sell their products can offer deals to consumers throughout the world. By providing historically unprecedented access to information, the internet has made markets throughout the world freer and more efficient to a degree we will never be able to numerically calculate.

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