Classroom Companion: Business

Further Reading
Laudon, K. C., & Traver, C. G. (2017). E-commerce 2017: Business, technology, and society. Pearson.
 
Chapter 17 · Digital Markets

---

© The Author(s), under exclusive license to Springer Nature 
Switzerland AG 2021
H. Øverby, J. A. Audestad, Introduction to Digital Economics, 
Classroom Companion: Business,
https://doi.org/10.1007/978-3-030-78237-5_18
259
Digital Market 
Modeling
Contents
18.1 
 Introduction – 260
18.2 
 Bass Diffusion Model – 261
18.3 
 Model for Markets with
Competition and
Churning – 268
18.4 
 Models for Massive Multiplayer 
Online Games – 271
18.5 
 Analysis of Real Markets – 275
18.6 
 Conclusions – 277
 References – 279
18

---

260
18
 
n Learning Objectives
After completing this chapter, you should be able to:
5
Identify the growth mechanisms of evolving markets.
5
Set up departmental mathematical models for simple digital markets.
5
Apply strategic issues such as latency, effects of churning, growth rate, and 
inflexion on the evolution of real markets.
18.1 
 Introduction
This chapter presents quantitative models for the temporal evolution of digital 
markets. The chapter requires some basic knowledge of elementary calculus such 
as ordinary differential equations and simple algebraic manipulations. Some of the 
mathematical derivations are placed in separate boxes to make the text more easily 
available also to those who are less skilled in calculus.
The objective is to uncover the dynamic behavior of markets that are common 
in the digital economy, for example, social media, interactive games, communica-
tion services, and sales of electronic gadgets. An evolving market is not in an equi-
librium state, and standard supply-demand theories do not apply to these markets. 
Moreover, in several of these markets, the marginal cost and the price of products 
is zero (e.g., Facebook and Google Search) making supply-demand curves mean-
ingless.
The purpose of this chapter is to show:
5
How the markets for certain products (e.g., durables and certain digital ser-
vices) evolve and mature as a function of time (
7
Sect. 
18.2
)
5
Why competition may, in some cases, lead to winner-takes-all markets and, in 
other case, to stable markets shared by several suppliers (
7
Sect. 
18.3
)
5
How markets like interactive games grow, mature, and die (
7
Sect. 
18.4
)
The temporal evolution of the market can, to a first approximation, be modeled 
using single first-order differential equations or coupled sets of such equations. For 
simplicity, all markets that are considered consist of a fixed number, N, of potential 
customers buying the good; that is, market variations owing to births and deaths 
processes are ignored. The equations then become simpler, and the solutions are 
easier to understand. The simplification does not alter the validity and generality 
of the conclusions.
In some markets, eventually all potential customers have purchased the good at 
some time, and no more sales take place. It is also assumed that there are no other 
saturation effects (e.g., insufficient supply) influencing the likelihood that a product 
is purchased. There are several examples of services that have evolved in this way—
for example, mobile phone subscriptions and Internet access. In both cases, no 
significant saturation effects caused by overload in the technical infrastructure have 
been observed during the evolution of these networks. Similar observations are 
made regarding the evolution of several social media services—the providers of the