ISMT101

Digital Economy (II)

Next Business implications
Mgmt

Organizational use
(1) Digital
Economy

• Industrial revolution 
information economy
• Career: IT+Business

Technology components People

Nature of the digital economy

-globalization -digitization
-speed -merger
-ideas -new markets
Digitization
Digitization
Digitization
Digitization
Digitization
Digitization
Digitization—impacts on companies

 New business

+
Review fundamental accounting concepts

 Fixed costs (FC)

 Variable costs (VC)
 Total costs (TC)
 Average costs (AC)

 Marginal costs (MC):

costs of making an additional unit
 Fixed costs=FC, marginal costs=MC, variable costs=VC
Total costs=TC, average costs=AC

 FC: copyright  FC: copyright

 VC: printing & binding  VC: make a CD

# FC MC VC TC AC # FC MC VC TC AC
1 1000 10 10 1010 1010 1 1000 1 1 1001 1001
2 1000 10 20 1020 510 2 1000 1 2 1002 501
3 1000 10 30 1030 343 3 1000 1 3 1003 334
… … 10 … … … … … 1 … … …
1000 1000 10 10000 11000 11 1000 1000 1 1000 2000 2
10,000 10.1 10,000 1.1
Summary
For e-books (or music CDs, etc.)
 Very difficult to produce the first copy
 Very easy to make copies
Digitization—impacts on companies

 Lower marginal costs

Encyclopedia Marginal Price

Britannica costs (USD) (USD)
Printing, binding, 200-300 1500-2200
physical
distribution
CD-ROM 1.50 50
Internet … …
Digitization—impacts on consumers

 Lower price
 Convenience
Digitization—impacts on the society

 Social Impacts
“In the digital world, anyone can use computers to create and distribute
creative works.” --Textbook, p.5

Blog
Online forum
Wiki
Discuss
What cannot be digitized……
Speed – commerce

Dell Computer:
One month 
3 hours
Speed – inventions
# Patents issued in each year in the U.S., 1836-2006
180000
160000
140000
120000
100000
80000
60000
40000
20000
0
1906

1996
1836
1846
1856
1866
1876
1886
1896

1916
1926
1936
1946
1956
1966
1976
1986

2006
Source: U.S. Patent and Trademark Office
Speed – new products
Shortening Product Lifecycles:
Personal Computers
25
22.2

20

15.5
15
Months

10
10 8.6
6
5

0
1988 1991 1993 1995 1997
Source: Mendelson and Pillai (1999)
Speed – diffusion of tech
Years to reach 50M users:
Radio =38; TV =13
Cable =10 Internet =5

Source: King et al. (2002)

Speed recap
 Commerce
 Inventions
 New products
 Diffusion of technologies
Merger of products/services
 Definition:
Combination of multiple products/services into a bundle

 A “physical” example:
Merger of products/services

Type I Type II
Service
“S+P” “S+S”

Type III Type I

Product
“P+P” “S+P”

Product Service
Merger of products/services
 Type I – Business case

+
Merger of products/services
 Type II – Business case
Merger of products/services
 Type III – Business case
Ideas
Information Economy /
Digital Economy

Information Revolution

Industrial Revolution
Time
New online markets
Huge market size
New online markets
Dynamic pricing
 Fixed pricing – same price, any time any place
 Dynamic pricing – the opposite
“price charged for goods automatically changes based on
current conditions or even who is making the purchase”
(p.7)

 Traditional examples
 Soft drink, airline
Dynamic pricing: flight from Australia to London (£)

1100

1000

900

800

700

600
8 9 10 11 12 1 2 3 4 5 Month

Source: www.australiaflightmarket.com (2006)

A tale of two bidders

–– Dynamic pricing @ eBay

Search: Prison break season 1
Same products, same seller
Auction #1: High bidder, HAC
Auction #2: High bidder, KAR
Finally, HAC and KAR won!
 Recap – a tale of two bidders

 Same product, same seller

KAR HAC
 Two bidders

$49.46 $55.35
Price
Take-away
 Digitization lowers marginal costs

 Three types of merger of products/services

 Dynamic pricing exists @ cyber space