The Impact of Customization and Pricing on Surpluses in a Digital Economy with Digital Goods

Many researchers show that “market institutions” are an ideal means to exchange and allocate resources under the assumptions of perfect and symmetric information and perfect competition. However, in the real world, we observe many instances in which these assumptions are not satisfied due to imperfect competition, incomplete information, transaction costs, and externalities. In this study we found that a posted-price market for digital goods with dynamic-price-update in a digital economy is efficient and the resulting market statistics are close to the competitive market equilibrium under a competitive environment. Another interesting finding from this research is that sellers with customization failed to capture all the consumers’ surplus, defying the prevalent myth that sellers may extract the entire surplus from the market by using customization on the Internet and by using information technology tools to identify individual customers. One major explanation for this result is that competition among sellers prohibits them from charging prices according to customers’ demand for each product, in cases where switching from one seller to another is not so difficult for the customers.