organizations and the digital economy tilburg october 2017 · organizations and the digital economy...
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Organizations and the Digital Economy
Workshop on Economic Governance of Data Driven Markets, Tilburg, 12th-13th October 2017
Paul SEABRIGHT, Toulouse School of Economics (TSE) and Institute for Advanced Study in Toulouse (IAST)
World’s largest firms by market capitalization
Rank 2007 2017
1 Exxon Mobil Apple
2 General Electric Google
3 Microsoft Microsoft
4 Royal Dutch Shell Amazon
5 AT&T Facebook
6 Citigroup Berkshire Hathaway
7 Gazprom Exxon Mobil
Let’sdis)nguishdifferenteffectsofdigitaltechnologyonmodernsociety(I)
Crea)on,processingandsharingofinforma)on–thescarceresourceisnolongerinforma)onbutATTENTION
Crea)onofnewgoodsandservices,fromsocialnetworksandGPSguidanceto…catvideos
Newmethodsformakinganddeliveringexis)nggoodsandservices 3Dprin)ng
Deliverybydrone
Internetda)ng,psychotherapyoverSkype
Distribu)ngthedesignandmanufactureofcarsandaircraNacrosstheworld
Theidea:taskscanbebrokenintocomponentsandreassembled
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Let’sdis)nguishdifferenteffectsofdigitaltechnologyonmodernsociety(II)
Crea)onofnewtypesoforganiza)on Outsourcedtasks,micro-mul)na)onals
Crowd-sourcedfinancing,informa)ongathering
PlaSorms–intermediariesbetweendifferentusergroups
Improvedmethodsofmanagingexis)ngorganiza)ons UsingICTtodiscoverandreachnewmarketsandsourcesofsupply
UsingICTtomonitor&improvemanagementprac)ces
Restructuringtaskalloca)on–butthisdependsontrust
Themechanism:digitaltechnologychangesthepaWernofsubs)tutability/complementarityrela)onsbetweentaskcomponents
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Outlineofpresenta)on
Anexampleofunbundlingandreassemblingtasks:MOOCs
Organiza)onsasallocatorsofen)tlementstoaWen)on
Comparinginforma)onrentsandaWen)onrents
Digitaltechnologyandthetrustrela)onship
Whyare“good”ICTprac)cesoNennotadopted,andwhenadoptedareoNennotop)mallyused?
Evidence:WorldManagementSurvey10
Anexampleofunbundlingandreassemblingtasks:theimpactofMOOCs(I)
Be_ngeretal:“VirtualClassrooms”,AERSeptember2017,inves)gateperformanceof230,000studentstaking750coursesinafor-profitUScollege,inbothon-lineandon-campusversions
On-campusversionsofcourseshadfewerwomen(35%comparedto55%),andanaverageageof28yearsasopposedto33yearsonline
Byinstrumen)ngwiththeinterac)onofrandomnon-availabilityofonlineversionsanddistanceofresidencefromcampus,es)matethatcourseswithphysicalpresenceincreasetheprobabilityofanA-gradeby12percentagepoints
Theimpactisconcentratedonlow-performingstudents11
Anexampleofunbundlingandreassemblingtasks:theimpactofMOOCs(II)
Thoughauthorstheydon’tinves)gatemechanisms,thekeyseemstolieinmo)va)on,whichisloweronline
It’samistaketoseeeduca)onasahomogeneousservicedemandedbystudents
Studentsdemandatleasttwodifferentservices:understandingandmo0va0on,andtheinputsintothisprocessareinforma0onanda3en0on–inpropor)onsthatdifferbetweenthetwoservices
PhysicalproximityisaspecialkindofaWen)on–“close”aWen)on
Wecanseeorganiza)onsasalloca)ngen#tlementtoa*en#on12
Organiza)onsasallocatorsofen)tlementstoaWen)on
Coasesawthemaindis)nc)onasbetweentransac)onsinsideversustransac)onsoutsidethefirm(“hierarchies”versus“markets”)
Infact,aWen)onen)tlementsarenotanall-or-nothingmaWer:therecanbemoreorlesspriorityen)tlements
Anorganiza)ondoesnotaccordequalprioritytoeveryoneinsidetotheaWen)onofeveryoneelse:instead,itallocatesaWen)onaccordingtoasetofescala)ngen)tlementpriori)es
Outsidetheorganiza)onaWen)onisallocatedbybilateralnego)a)onundertheconstraintsofacommunica)ontechnology
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Sohowdoorganiza)onsallocateen)tlementstoaWen)on?
Inprac)ceorganiza)onsneverallocateaWen)onen)tlementswithperfectefficiency.Whynot?
Exis)ngaWen)onen)tlementscreatevetopower,whichcanpreventefficientreorganiza)onwhentechnologychanges
Animportantreasonorganiza)onsdifferintheirresponsetotheavailabilityofinforma0ontechnologyisdifferencesintheexis)ngalloca)onsofa3en0on,whichcreatedifferentconfigura)onsofwinnersandlosersfromadop)ngthenewtechnology
Realloca)nginforma)onandrealloca)ngaWen)onmayhavequitedifferenteffects–andlosersmaynottrusttheoutcome
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Informa)onrentsandaWen)onrents:
Collec)nginforma)onaboutconsumerbehaviorandpreferencesissubjecttomajorscaleeconomies–becauseinforma)onis(usually)aNON-RIVALgood
CapturingandholdingaccesstothescarceaWen)onoftheconsumerisalsosubjecttomajorscaleeconomies–butforadifferentreason–thelimitedprocessingcapacityofthehumanbrain
AndaWen)onisalwaysaRIVALgood,atleastpar)ally
Informa)on-sharingcanbeasolu)ontomonopolyproblems–butaWen)on-sharingcannot!AWen)on-sharingcanevenmakeeveryoneworseoff…
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Comparingrentsfrominforma)onwithrentsfromaWen)on:thethreephasesofmobiletelephony
“Thedeathofdistance”markedthefirstphaseofmobiletelephony
Averyvaluableservice–butacommodity
Value-addedservicesmarkedthesecondphase–datatransfer,photos
Innova)on-intensive(buttherentsareconstantlybeingcompetedaway)
Thethirdphase:geographyisback!
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Thesourcesofrentsininforma)on-accumula)on(I):
Observa)onofconsumerbehaviorrevealspreferencesthatareusefulforpredic)ngfuturebehavior
Twofactorsthathelprefinesuchpredic)ons:LOCATIONinforma)onandNETWORKinforma)on–bothsubjecttolargescaleeconomies
Compareawebsearchfor“LatestSyriaNews”ontwosearchengines
Nowcompare“WatchstrapAn)bes”ontwosearchenginesonacomputer
Andthesamesearchonasmartphone17
Thesourcesofrentsininforma)on-accumula)on(II):
Collec)ngdetailedinforma)onaboutconsumerpreferencescreatesRENTSfromthebeWermatchingofconsumerwantsandproduc)onpossibili)es
Some)mesthisleadstofirst-degreepricediscrimina)on–consumerisnobeWer(andnoworseoff)thanwithoutinforma)on,butfirmcollectsalltherent
Whenthereisanintermediary(egasearchengine)therentcanbesharedwiththeproducer(egviathesecond-priceauc)onmechanism)
ONentheintermediaryinducescompe))onamongproducersandsharesrentwiththeconsumer(egtravelwebsites)
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Thesourcesofrentsininforma)on-accumula)on(III):
However,some)messtrategicuseoftheinforma)onbyathirdpartymaymakethecustomerworseoffthaniftheinforma)onhadnotbeencollectedatall
Example:amedicaldiagnosisofaseriousdiseasethatdoesnothelpfindtreatmentforthecondi)onbutleadstodiscrimina)onagainstthepa)ent,byaninsureroranemployer
No)ce:some)messuchstrategicproblemsresultincollec)ngtooliWleinforma)on,nottoomuch!
Example:Yervoy,anan)-melanomadrugcommercializedbyBristol-Myers-Squibbin2011(seeScoWMorton&Seabright2013)
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RentsfromscarceaWen)on(I)
Ofinteresttoneuroscien)sts,economistsandmarketers.HerbertSimon:“Awealthofinforma)oncreatesapovertyofaWen)on”
Neuroscien)stsarefascinatedbythemechanismsthatallocateaWen)onintheshortterm(seeTorkelKlingberg:TheOverflowingBrain),byhowthesecanbemanipulated,andbythefactthatwehavesoliWleawarenessofouraWen)ondeficits
Economistsareinterestedintheques)onwhetheraWen)onisop)mallyallocated,orwhetherthereisan“overfishing”problem
Marketerswanttoknowhowtofishmore..
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RentsfromscarceaWen)on(II)
Onceanintermediary(searchengine,newsportal,smartphoneinterface)hastheaWen)onofauseritcaninfluencetheuser’ssubsequentchoices.CalltheseGATEKEEPEReffects
ThisisnotjustamaWeroftheintermediaryANTICIPATINGtheuser’spreferences(likeaweatherforecasteran)cipa)ngtheweather)–thoughthean)cipa)oneffectiscertainlypresent.
Glicketal(2014)controlforan)cipa)oneffects–whicharestrong–andfindstrongresidualgatekeepereffects
TheytestwhethertheseareduetoREPUTATIONorCONSPICUOUSNESS–botharepresentwithreputa)oneffectsbeingstronger
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Implica)onsforefficiency(I)
Informa)on-accumula)onaboutconsumerpreferencescanberent-crea)ngorstrategicallymanipula)ve
Consumersneedsafeguardsagainststrategicmanipula)on–thisisaboutprivacybutnotjustaboutprivacy.It’saboutchoosingwithwhomtoshareinforma)onwheninforma)oncanbepassedon
Becareful:informa)onLEAKS!
Wheninforma)onisrent-crea)ng,leakageisusuallybeneficialasitcreatescompe))on.Informa)on-sharingcanbePRO-COMPETITIVE!
Evenwhenitdoesn’t,first-degreepricediscrimina)onisnotsobad…22
Implica)onsforefficiency(II)
Monopolisa)onofscarceuseraWen)onisamoredifficultproblemtoassessandtodealwith
ItoNenarisesasaby-productofinforma)onaccumula)on
ThefactthataWen)onisaRIVALgoodmeansitcan’teasilybeshared…..
Thenextbestsolu)on:itcanbeCONTESTED
Butcontes)ngaWen)onmaycreateproblemsofTRUST
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Digital technology and the trust relationship
Traditionally trust has mattered in economic relationships for two main reasons
First, people in an economic relationship have to do what they promise to do – in terms of quantity and quality
Secondly, they have to trust in the durability if their relationship enough to be prepared to makes specific investments – those that are worth doing only if the relationship continues
Digital technology makes the first type of trust easier - but the second often more difficult!
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A useful pair of concepts: substitutes and complements
Two substitute goods: if the price of Coke rises, the demand for Pepsi increases
The presence of Pepsi exerts a moderating influence on the price of Coke
It would be bad for a single firm to coordinate the prices (or other characteristics) of Pepsi and Coke
Two complementary goods: if the price of razors rises, the demand for blades decreases
The price rise creates a negative externality for the seller of blades
There are benefits to both firms and consumers in coordinating the prices (and other characteristics ) of razors and blades
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Lessons for organizational design
Where two activities are complements it’s usually a good idea to coordinate their management (eg by putting them under the same manager)
Value added often comes from discovering previously unknown complementarities
Where two activities are substitutes it’s usually a good idea either To avoid doing both, or
To put them under different managers to benefit from comparison
Cost reduction usually comes from eliminating unnecessary substitutes
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What is different about substitutes and complements in the digital economy?
In many traditional industries, whether two goods are substitutes or complements is usually clear, and the answer
Doesn’t change much over time
Is similar for most users of the product
Technology is usually complementary to both labor and management
In the knowledge economy this is no longer true!
Consider cars: up to now, IT made drivers better (was a complement), but will soon make them redundant (it’s a substitute)
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Three types of novel case
Complements today, substitutes tomorrow
Complements for Smith, substitutes for Jones
Complements for one side of the platform, substitutes for the other side of the platform
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Case 1: today, tomorrow?
A product which is a complement today could evolve into a substitute in the future
Examples: Windows and Netscape Navigator
Google and Booking/Expedia
Can substitutes also evolve into complements? Yes! Recorded music/concerts, free/paid web content
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Case 2: Smith, Jones?
Products which are complements for one group of users may be a substitute for a different group of users
The general reason: the value of information depends on what information the user already has
Possible examples: Instruction manual/helpline
General/specialized search engine
Single TV programs/series
Different stages in a search chain (eg Google/Amazon)
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Case 3: Two sides of the platform
Products which are complements for users on one side may be substitutes for users on the other side
One example: TV programs/websites for viewers and for advertisers
For viewers, some programs/websites enhance the demand for others, so these are complements
For advertisers, all may be alternative ways to getting access to viewer attention, so same programs/sites may be substitutes
A price comparison website (PCW) and services of online retailers Complements for buyers, substitutes for retailers
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How does this help us to understand the puzzle of trust in the digital economy?
Trust in what people promise to do is often improved by ICT Knowing that substitutes are available for your services is a very good
incentive to keep your word
ICT makes it possible for people to monitor the trustworthiness of others and choose alternatives if trust is not high enough (see eBay).
Trust in the stability of the economic relationship is often undermined by ICT:
Tasks can be divided up in new ways as complementarity/substitutability relationships change, often very suddenly
Everybody can be Uberized – even university professors!
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Can this help us understand why many “good” ICT practices are not adopted?
A general answer: because the people with the power to adopt them fear them as substitutes, not as complements!
Compare:
Yield management systems for airlines, IT in retailing – big productivity gains, rapid adoption
Electronic medical records (EMRs) in health care – small gains, slow adoption
The lesson: good ICT practices need a champion within the organization!
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Evidence: The World Management Survey
A joint Harvard-LSE-Stanford initiative
Has collected data on 15,454 firms in 35 countries since 2001. Mostly manufacturing (11,300) but some retail, hospitals and schools.
Scores 18 management practices from 1 (“worst”) to 5 (“best”) in areas of
Monitoring what happens inside the firm
Targets (setting objectives and matching them to outcomes)
Incentives/people management (promoting and rewarding employees based on performance)
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The World Management Survey: findings
By firm, management scores are positively correlated With performance indicators
With intensity of IT use – but what determines this?
By country, management scores, though highly dispersed, are positively correlated
With GDP
With the extent of competition (including via FDI)
With flexibility of regulation
With management and workforce education
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AggregateeffectsofICTonthedemandside
Thegrowthof“superstarfirms”andthefallintheshareoflaborinvalueaddedintheeconomy
AccordingtoarecentpaperbyBloometal(2017),thefallinthelaborsharethroughouttheindustrializedworldsincethe1970sisNOTduetoindividualfirmsbecomingmoreprofitable
It’sduetoashiNintheshareofoutputtowards“superstarfirms”whoaremoreprofitableandhavehigherproduc)vity
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Take-homemessages
Weliveinaninforma)on-richenvironmentthathascreatednewchallengesusasindividualsandalsoasmanagersandci)zens
Informa)onprovidespoten)albenefitsasacomplementtoourexis)ngsourcesofac)vityandprosperity
Butbecauseofitsaffectsonen)tlementstoaWen)on,canalsobecomeasubs)tute–andthereforeathreat!
Usinginforma)onwiselymeanslookingforsourcesofcomplementarity–ICTneedschampionstobeadoptedandused
Butitalsomeansreassuringpeopleaboutthethreatstotheirlivelihood
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