overview 11 This mechanism operates in two ways. First, the dra- Figure O.8 Many digital transactions involve all three matic decline in the price of digital technologies has mechanisms and a two-sided market led businesses and governments to replace existing factors—labor and non-ICT capital—with ICT capital INNOVATION and to automate some of their activities. Airlines use online booking systems to fill planes. Supermarkets substitute cashiers with automated checkout count- Platforms ers. Manufacturers use real-time inventory and sup- ply chain management systems. And governments invest in information management systems and offer INCLUSION EFFICIENCY online services for a wide range of tasks—from issu- ing drivers’ licenses to filing taxes. Second, digital technologies augment the factors Sellers Buyers not substituted and make them more productive. They help managers to better supervise their workers, poli- Drivers, hosts, On-demand/ Riders, guests, and ticians to monitor the service providers, and workers and freelancers sharing economy small businesses to use technology to become more productive, thus Job seekers, travelers, Matching Employers, airlines raising the returns to their human capital. By stream- entrepreneurs, and artists platforms and hotels, investors, lining tasks and raising the productivity of existing and consumers factors, the internet can greatly increase economic Traders and senders e-commerce and Customers and efficiency across firms, workers, and governments. (money) digital payments recipients (money) The internet promotes innovation Source: WDR 2016 team. The extreme case of efficiency is when transactions are executed automatically, without human input, Many internet businesses or services use a platform and transaction costs fall to essentially zero. This is or “two-sided market” model. The platforms match the realm of the “new economy,” such as search or buyers with sellers or a service user with a provider. e-commerce platforms, digital payment systems, In a ride sharing service, the platform automatically e-books, streaming music, and social media. The fixed matches drivers and passengers (innovation), the cost of building the platform may be large, but the driver takes advantage of a flexible income-earning marginal cost of carrying out another transaction or activity not otherwise accessible (inclusion), and the adding another user is tiny. This gives rise to increas- passenger benefits from greater convenience and ing returns to scale, which stimulate new business often lower prices (efficiency). Online crowdfunding, models and provide a major advantage to online job matching, room sharing, and music sites operate firms competing with their offline counterparts. The similarly (figure O.8). zero marginal cost attracts new sellers and buyers to the firm’s platform, creating virtuous network effects, where the benefit to a buyer increases as more sellers The dividends: Growth, jobs, join in, and vice versa. An auction site attracts more and service delivery bidders the more the sellers use it, and a search engine learns and becomes more useful the more searches The benefits of digital technologies filter throughout are performed. Scale and zero marginal costs also the economy (figure O.9). For businesses, the internet explain why many of the social network sites have promotes inclusion of firms in the world economy by become the preferred vehicles for social mobilization expanding trade, raises the productivity of capital, and political protests. By enabling almost frictionless and intensifies competition in the marketplace, which communication and collaboration, the internet can in turn induces innovation. It brings opportunities to support new delivery models, encourage collective households by creating jobs, leverages human capital, action, and accelerate innovation. and produces consumer surplus. It enables citizens to The 2016 WDR presents many examples of how access public services, strengthens government capa- the internet promotes inclusion, efficiency, and bility, and serves as a platform for citizens to tackle innovation. In the internet economy the three mecha- collective action problems. These benefits are neither nisms often operate together. So the one-to-one map- automatic nor assured, but in numerous instances ping in figure O.7 simplifies a more complex reality. digital technologies can bring significant gains.