The Future of the Digital Economy

Abstract

This chapter surveys effects of digital technologies on traditional economic research areas ranging from price negotiation to search activities, from product choice to monetary policy. The Internet and its commercial uses have stimulated a high level of interest but electronic commerce is often seen as an alternative marketing channel to existing physical media or markets. However, computer and networking technologies have the potential to transform not only the way we shop but also the way our economy operates. An economy characterized by these technologies is the digital economy where market agents behave differently under different sets of economic rules from the physical economy. We begin by discussing some economic implications of digital technologies. Then we examine major research issues in Internet infrastructure pricing, network effects, online auctions, advertising and consumer search, customized product and pricing, antitrust policies, fiscal and monetary issues and market globalization. Our goal is to demonstrate how fundamental are the economic transformations triggered by the use of technologies. We conclude by noting that computer and networking technologies not only improve efficiencies at the margin but also present a new type of market which might be a textbook example of a perfect market that requires a more vigorous reexamination of traditional economic assumptions and results.