How the Digital Economy affects markets and firms

How the Digital Economy affects markets and firms

Courses Info

Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

Market information in the digital economy

Price comparison sites

  • These have helped to increase the knowledge consumers have regarding a good / service – reducing some of the asymmetric information between consumers and suppliers
  • Consumers can make comparisons between different websites to explore the best deals which will give the most value for money

Viral marketing and social media

  • Firms cause viewers of a promotion to share it with friends, creating campaigns which can go viral
  • Firms can use social media platforms to promote their products and increase brand awareness
  • Using social media platforms, firms can collect feedback from consumers in aid of developing existing products to make them better suited for consumer demands or creating new products to fit current trends

The Demand-Side

Wider geographical markets

  • The Long Tail Theory – implies consumers get a wide variety of products with online retailing. Firms sell a large quantity of niche products to satisfy the consumer’s needs, but only a small amount of each product
  • Online retailing also suggests that storing / distribution costs will be low, allowing for a greater range of products to be sold and grants firms with access to the worldwide market
  • Consumers can chose products from worldwide markets

The Supply-Side


  • This contrasts mass-marketing and is associated with e-commerce
  • Advertising is focused on a small group of consumers

Online Retail and Online Distribution

  • There has been an increase in the demand for workers with digital skills since online retailing has become widespread
  • If there is a shortage of staff with digital skills, it can become expensive for firms to have to train their workers

Impact on markets and firms

  • Digital Economy has affected the way consumers shop, the price and choice that they get
  • The loss of famous brands such as blockbuster, Peacocks, and Comet could have stemmed as a result of the Digital Economy
  • Technological advancements leads to increased productivity and efficiency, as well as lower costs of production – leading to better quality products being produced
  • Digital Economy has created new competition for existing markets
  • The process of Creative Destruction has further advanced as a result of the Digital Economy


Quick Fire Quiz – Knowledge Check

1. Identify and explain two forms of market information in the digital economy (8 marks)

2. Explain the impact of wider geographical markets, with reference to the ‘Long Tail Theory’ (4 marks)

3. Identify and explain two supply side effects of the Digital Economy (8 marks)

4. Explain the impact on markets and firms (6 marks)


Next Revision Topics

  • Business Growth
  • Business Objectives
  • Research & Development and Innovation
  • How small firms compete


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