Volume 6, Issue 2 - The Economics of Digital Business Models

The paper proposes an analytical framework for comparing different business models for producing information goods and digital services. It is based on three dimensions that also refer to contrasted literature: the economics of matching, the economics of assembling and the economics of knowledge management. Our framework attempts to identify the principal trade-offs at the core of choices among alternative digital business models, and to compare them in terms of competitiveness and efficiency. It also highlights the role played by users in the production of information goods and competition with pure suppliers.

This paper provides a first pass at comparing two polar strategies for market intermediation: "merchant" mode – buying from sellers and reselling to buyers - and "two-sided platform" mode – enabling affiliated sellers to sell directly to affiliated buyers. The merchant mode is more profitable when the chicken-and-egg problem for the two-sided platform is more severe and when the degree of complementarity among sellers' products is higher. The platform mode is preferred when seller investment incentives are important or when there is asymmetric information regarding seller product quality. We discuss these tradeoffs in the context of several prominent digital intermediaries.

This paper develops a model of oligopolistic price competition to analyze the impact of online intermediaries such as Autobytel.com on the price setting process in the automobile market. The roles of dealer search costs, the fraction of buyers using the intermediary, the value of the item being sold, and heterogeneity in buyer bargaining abilities are explored. The model provides theoretical insights relevant to the empirical literature addressing the role that intermediaries like Autobytel play in online markets. For example, we present conditions under which the price offered through the intermediary is either higher or lower than offline (bargained) prices.

Developing a simple model of the content and access industries in the digital era, we show that, given the positive consumption externality from entertainment content (music, video) on access networks and playing devices (fixed broadband, 3G mobile, digital players, etc.), both content and access industries have an interest in blurring their business frontiers. As digital piracy, which is still increasing the above externality, benefits access providers to the detriment of content providers, a "win-win" game is possible only if access providers participate in content production, either through a subsidy or co-production.

Most digital goods have a modular design; that is, they consist of complementary and distinct building blocks, called modules. Modular product design, in contrast to integrated (or integral) design, enables alteration of a specific module that is usually assigned for a specific function without necessarily requiring an entire redesign of the product. This feature facilitates product innovation. The possibility of having common modules embedded in a range of products is likely to affect firms' product innovation strategies and post-innovation competition both in traditional and digital markets. In this paper, we explore such effects with a focus on digital markets.

Peer-to-peer (P2P) services allow users to share networked resources, notably bandwidth and content, from the edges of the network. These services have been popularized because of file sharing – particularly the sharing of unlicensed copyrighted files. However, content owners are increasingly exploring the ability of peer-to-peer networks to accommodate legitimate content distribution and promotion. In this article, we review the economic characteristics of P2P networks and outline the implications of these characteristics on efforts to counteract illegal piracy and on potential uses of P2P networks in a commercial media distribution strategy.

We designed a platform with a betting mechanism for eliciting costly, dispersed information of different quality. Our objective is to elicit both dispersed information and the precision of the information so as to efficiently weight dispersed information to produce reliable forecasts. After deciding to incur the costs to acquire information, participants will report their forecasts and decide the size of their bets to indicate precision. Our mechanism selects those with relatively precise information at lower costs. We also discuss the implementation issues of our mechanism and the implication to fulfil the task of crowd sourcing.

This paper traces the history of TEX, the open source typesetting program. TEX was an early and very successful open source project that imposed its standards in a particularly competitive environment and inspired many advances in the typesetting industry. Developed over three decades, TEX came into competition with a variety of open source and proprietary alternatives. I argue from this case study that open source developers derive direct and indirect network externalities from the use of their software by others and must therefore consider non-developers' needs to make their software more attractive to a broader audience and more competitive with proprietary alternatives.