Goldfarb and Tucker (2019), "Digital Economics." Journal of Economic Literature, 57 (1): 3-43.

Research on digital economics examines whether and how digital technology changes economic activity. The authors examine how this shift in costs can be divided into five types:

(i) Lower search costs

Low search costs make it easier for consumers to compare prices, putting downward pressure on prices for similar products. Reduced search costs facilitate exchange more generally, often enabled by large digital platforms. The reduced costs of search have led to the development of online “peer-to-peer” platforms dedicated to facilitating matching. Furthermore, the authors find, digitization has led to an increase in the prevalence of platform businesses that go beyond the peer-to-peer model.

(ii) Lower replication costs

In the absence of deliberate legal or technological effort to exclude, bits can be reproduced by anyone—not just the producing firm—at near zero cost without degrading the quality of the initial good. The authors find that copyright law is more important in digital markets because goods can be copied at zero cost. Stricter enforcement of copyright appears to increase revenue to the copyright holder, increase some incentives by potential copyright holders to innovate, but reduce incentives by others to build on copyrighted work. Nevertheless, the literature also shows that, despite ease of copying, digitization has not killed creative industries because production and distribution costs have fallen and because the technology has caught up to facilitate copyright enforcement.

(iii) Lower transportation costs

The cost of distribution for digital goods approaches zero and the difference in the cost of nearby and distant communication approaches zero. In addition, digital purchasing technologies have reduced transportation costs. The authors find that when regulation does not reach into the online sphere, the zero transportation costs of information in the online channel generate a disproportionate benefit of online information in regulated contexts. However, when regulation does reach the online sphere, it can have a substantial effect on the nature of the Internet across locations.

(iv) Lower tracking costs

This type of cost has only become more visible in the past decade. Digital activity is easily recorded and stored. In fact, many web servers store information automatically, and firms have to make a deliberate decision to discard data. Reductions in tracking costs enable personalization and the creation of one-to-one markets, leading to renewed interest in established economic models with asymmetric information and differentiated products such as price discrimination, auctions, and advertising models. The authors find that low tracking costs have led to a renewed interest in the economics of privacy, and that the economics literature on privacy, both offline and online, grapples with the question of how privacy should be treated in terms of the consumers’ utility function. Privacy regulation puts a cost on tracking information flows. As such, the precise nature of privacy protection can be expected to matter a lot for the direction of innovation; it is not a matter of a simple binary choice to have privacy protection or not.

(v) Lower verification costs

The reduction in tracking costs has also led to a reduction in costs associated with the verification of identity and reputation. This was not anticipated by the early literature in economics because the earliest reporting on the Internet suggested that it would be a vehicle for anonymity. A key application is to provide information on product quality. One problem is that reputation systems can fail, eg because of the bias or self-selection of those providing reviews. Another is that the use of algorithms to parse data and automate the allocation of resources and decision making might perpetuate or exacerbate discrimination.