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A Simple Economic Model to Explain Different Digitization Patterns

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  • Florian W. Bartholomae

Abstract

Many firms have to decide whether and how much of their business activities they want to digitize. Several studies point to considerable differences, especially between small- and large-sized firms. This paper develops a simple model that shows under which conditions digitization can be profitable for a firm. At first, different competitive situations are taken into account and subsequently, the effects of security problems on digitization decisions are examined using the example of the dangers of a cyberattack. The results show that digitization is a dominant strategy, which results in a prisoner’s dilemma if the competition is fierce. Moreover, in highly competitive markets, firms should set common security standards to protect against unauthorized access.

Suggested Citation

  • Florian W. Bartholomae, 2020. "A Simple Economic Model to Explain Different Digitization Patterns," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 66(4), pages 239-257.
    • Handle: RePEc:dah:aeqaeq:v66_y2020_i4_q4_p239-257
    DOI: 10.3790/aeq.66.4.239
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    More about this item

    Keywords

    cybercrime; digitization decision; dominant strategy; duopoly; Germany;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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