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Minding the Digital Economy’s Narrowing Gaps

Summary:
By collapsing physical distance, the digital economy has overcome one of the largest traditional hurdles to market formation and efficiency. But data-driven digital markets come with their own unique informational challenges, demanding further innovation not just by entrepreneurs but also by policymakers.  MILAN – Informational asymmetries between buyers and sellers have long been known to impair market performance. But thanks to digital technology and the large, accessible pools of data that it generates, these informational gaps are closing, and the asymmetries are declining. The Way We Could Live Now PS OnPoint Getty Images

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By collapsing physical distance, the digital economy has overcome one of the largest traditional hurdles to market formation and efficiency. But data-driven digital markets come with their own unique informational challenges, demanding further innovation not just by entrepreneurs but also by policymakers. 

MILAN – Informational asymmetries between buyers and sellers have long been known to impair market performance. But thanks to digital technology and the large, accessible pools of data that it generates, these informational gaps are closing, and the asymmetries are declining.

Until recently, market formation has been circumscribed by physical and geographical boundaries. A prerequisite for a market to form is that buyers and sellers are able to find each other, and this process has traditionally been accomplished in physical spaces like bazaars, stock exchanges, stores, or dealerships (albeit with intermediaries using phones and fax machines to facilitate transactions). Things started to change with eBay, the original model for many online marketplaces. Suddenly, geographical boundaries no longer operated as insurmountable barriers between widely dispersed buyers and sellers.

Arguably, freeing markets from geographical constraints has had the greatest impact on market access for remote populations. In many places globally, and for subsets of potential consumers everywhere, online channels can be the only practical option for accessing a wide range of goods and services, including primary health care and education. This applies to both the demand and the supply side. And because consumers enjoy expanded access to goods and services, sellers and producers can scale up dramatically to meet the increased demand. In China, for example, the digital expansion of the potential market for small and medium-size enterprises was a major impetus for much of Alibaba’s development, demonstrating how digital technologies, together with the rapid growth of the mobile Internet globally, can drive more inclusive growth patterns.

As online marketplaces developed, however, it soon became clear that additional information issues would need to be...

Michael Spence
Nobel Prize in economics, Economics professor at Stern School of Business NYU, author of The Next Convergence

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