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)

Making sense of the potential of ICT for organizations…

Annual smartphone sales

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

8

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

9

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

13

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

14

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…

15

Comparingrentsfrominforma)onwithrentsfromaWen)on:thethreephasesofmobiletelephony

“Thedeathofdistance”markedthefirstphaseofmobiletelephony

Averyvaluableservice–butacommodity

Value-addedservicesmarkedthesecondphase–datatransfer,photos

Innova)on-intensive(buttherentsareconstantlybeingcompetedaway)

Thethirdphase:geographyisback!

16

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)

18

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)

19

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..

20

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

21

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

23

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!

24

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

25

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

26

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)

27

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

28

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

29

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)

30

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

31

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!

32

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!

33

Source: Center for Disease Control; National Electronic Health Records Survey

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)

35

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

36

AggregateeffectsofICTonthedemandside

Thegrowthof“superstarfirms”andthefallintheshareoflaborinvalueaddedintheeconomy

AccordingtoarecentpaperbyBloometal(2017),thefallinthelaborsharethroughouttheindustrializedworldsincethe1970sisNOTduetoindividualfirmsbecomingmoreprofitable

It’sduetoashiNintheshareofoutputtowards“superstarfirms”whoaremoreprofitableandhavehigherproduc)vity

40

Share of labor in value-added: USA

Share of labor in value-added: France

Take-homemessages

Weliveinaninforma)on-richenvironmentthathascreatednewchallengesusasindividualsandalsoasmanagersandci)zens

Informa)onprovidespoten)albenefitsasacomplementtoourexis)ngsourcesofac)vityandprosperity

Butbecauseofitsaffectsonen)tlementstoaWen)on,canalsobecomeasubs)tute–andthereforeathreat!

Usinginforma)onwiselymeanslookingforsourcesofcomplementarity–ICTneedschampionstobeadoptedandused

Butitalsomeansreassuringpeopleaboutthethreatstotheirlivelihood

43

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)