Abstract
This chapter outlines the outstanding importance of the price system and briefly discusses the corresponding conditions. It examines the extent to which digital technology makes a difference. In a first step, it focuses on how prices are formed in concrete terms and to what extent digitalisation has a transformational effect in this context, e.g. with regard to the new level of transparency, prices set by algorithms, price discrimination and dynamic pricing. The chapter then discusses the consequences for economic policy and explains the extent to which there is a crucial link between the price system and the normative foundations of the economy.
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Notes
- 1.
Even at the time of the publication of the “Principles of Economic Policy”, this quotation needed explanation. The corresponding footnote read: “‘Here lies Toulon!’ Napoleon obstinately repeated, pointing—instead of to the town Toulon—to the estuary which formed the key position for the conquest of Toulon. And thus he won his first great victory” (Eucken 2004, 255, footnote 1, own translation).
- 2.
Of course, real competition is also bound to a whole series of institutional preconditions; what is meant here in principle is not the closest possible approximation of real conditions to the ideal-typical situation of perfect competition, but that the economic actors can compete with each other to the greatest possible extent by being able to orient their conduct to real conditions. Since the conditions for this are not only economic, but also social, spatial, etc., the complexity of the environment of the economic system is so high that it will in principle not function completely without interference, and this also applies to prices themselves. Here we focus on the exact function of prices and the extent to which they can be largely preserved from disturbances and why.
- 3.
Of course, there are also studies on price formation in general and on payment or different forms of money in particular, which need not be discussed here. As far as the coordinative capacity and the potential for the development of productivity are concerned, the modern economy based on a modern money system (on this in the next chapter) makes a qualitative difference to all other forms. See the extensive as well as instructive account concerning the use of money by Einzig (1966).
- 4.
“(…) Scarcity of means to satisfy given ends is an almost ubiquitous condition of human behaviour” as Robbins (1932, 15) put it. With reference to Menger, Mises, Fetter and Strigl, he accordingly makes this phenomenon the subject of economics: “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses” (ibid). A detailed theoretical-historical account of the meaning of scarcity is not the subject of this chapter; for the purposes of this book, we can leave it at this reference and assume the term to be common and sufficient in its generality here. See also footnote 4 in Chap. 1.
- 5.
This connection is also crucial with regard to another dimension, because similar to languages, one reason for the use of a certain currency is the network effects relevant here. This issue is addressed in more detail later. Interestingly, Auer et al. (2021, 2) mention money as “society’s ‘memory’”, referring to Kocherlakota and Wallace (1998).
- 6.
With the view that prices fulfil a kind of epistemological function that is crucial for the success of economic endeavours, this study follows the view of F.A. Hayek. Hayek, in order to explain the productive coordination performance of markets, had gone beyond the original conception of the economics as the science of the “relationship between ends and scarce means” and focused on the problem of the “division of knowledge” (see Hayek 1948): The core problem of the economy, the “economic order”, which is also the topic here, was for him correspondingly “(…) determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess” (Hayek 1945, 519). Now, one can justifiably object that this “price theory” has also been disputed in detail [see, for example, the extremely lucid critical account by Bronk (2013), who, while attesting “serious flaws” (ibid., 82), nevertheless calls it “peerless” (ibid. 102)], for the purposes of this book, however, the perspective is quite decisive, since digital technology is so successful precisely because it can absorb knowledge. This will be discussed in detail in the following chapters. In this section, we will content ourselves with adopting Hayek’s core argument, albeit in a condensed form.
- 7.
This points ahead to the topic of the chapter treating monetary stability: complex value chains can only come about under the condition that prices (i.e., from another perspective: money) are relatively stable and they can also only be sustained under this condition.
- 8.
One can indeed speak of “paying” in the case of monetarily free offers, because an exchange takes place. While in the case of payment with money, the good or service can be weighted against the demanded amount of money formulated with the price, this relationship is much more complex in the case of an exchange for data. See Chap. 7 for more details.
- 9.
In this area of phenomena, quite typical for the digital economy, various elements interact, which for heuristic reasons are considered separately and presented from different perspectives in this book. This chapter is primarily concerned with how digital technology influences the process of price formation. In Chap. 7 on property, the focus will be on the data itself and, accordingly, on property rights and information asymmetries.
- 10.
One may make restrictions here, because since ever the possession of capital, the existence of production capacities has generated power and dependencies and sometimes also made price discrimination, etc. possible. Digitalisation, however, enables a completely new scope of these phenomena, since the penetration of wide areas of reality is incomparably deeper; borders of nations, of the private realm, even of the natural and the artificial lose significance in the face of the processing capacity of digital technology, while the capacity for commodification grows. This is exactly what we will try to shed light on from different angles in the following chapters.
- 11.
However, the possibility to expand and refine the search can also increase the effort of the search. See, e.g., Hanna et al. (2019).
- 12.
Information asymmetries between both market sides can potentially lead to worse market outcomes, a phenomenon noted most famously by Akerlof (1970) which has become well known under the label of the “market for lemons”.
- 13.
This, of course, also creates the possibility for influence, which is not the same as better information. Is not for instance, that “fake news” is one of the most burning issues of the digital age? See for example Kshetri and Voas (2017). In the digital economy, several aspects are important here, which will be discussed in more detail in the next chapter. This section is limited to the function of prices.
- 14.
Menu costs are also much lower in terms of time and money. Outside the internet, this can also be tracked in everyday life, e.g. in the form of e-shelf labels. See, e.g., European Central Bank (2021a), 93.
- 15.
- 16.
One of the most important drivers of this trend is to be seen in the platforms that use the corresponding tools, namely signalling and screening techniques. See Chap. 7 for more details.
- 17.
See for the inflation topic Sect. 5.3.
- 18.
Chapter 7 is devoted in detail to this extremely complex issue. Here we focus exclusively on the question of the extent to which the use of data has an influence on price formation in the narrower sense. Here, as elsewhere, this focus is a heuristic approach that inevitably leads to partial thematic overlaps of sections.
- 19.
Data, or rather the collection, processing and, if necessary, sale of data, is of course the core of the digital economy. In the form of artificial intelligence, the dynamics unfolding here have already taken on a life of their own in some areas. Kemp (2020, 10) has summed this up well with reference to Cannataci (2018) and Mayer-Schönberger and Ramge (2018): “Machine learning is data hungry”. This connection will be examined again and again from different perspectives in the following chapters.
- 20.
Sticking to the wording, one might object that even a banknote “is not worth anything per se”; but the banknote is the official documentation of a claim.
- 21.
- 22.
Admittedly, it may be that a girl gets her ice cream for free from the lucky seller in exchange for her phone number. But this situation cannot be generalised—and, as mentioned above, we are not interested in marriage markets here. Data may have exchange value in some circumstances, but it will be of limited use and often quite cumbersome to exchange certain data for certain data, whereas currencies can usually be exchanged readily. And the exchange of telephone numbers not only follows a different logic, but even becomes quite unlikely in general under the premise that one could only be exchanged for the other.
- 23.
This is a quite complex issue especially for competition law, here only a general overview of the problem can be offered. The areas of application of such bots are of course very broad and there is an impressive variety just in this area, such as arbitrage bots (see Angerer et al. 2022), online shopping bots (already Sadeddin et al. 2007; Serenko and Hayes 2010), or for manipulating ticket prices (Courty 2019) and so on. The imagination knows no bounds as long as money can be made with it. “May the bots with you!” (Malik et al. 2022).
- 24.
A remarkable phenomenon insofar as volatility actually has to be priced into the long term, which theoretically leads, in the long term, to a higher price level.
- 25.
The academic discussion on this is quite broad and it is obviously connected mainly in the context of competition theory or competition theory issues. Accordingly, remarkable problems also arise for the legal sciences in this context. See, for example, Ezrachi and Stucke (2016), Harrington (2018), Kühn and Tadelis (2018), and also Schwalbe (2018).
- 26.
An aspect directly related to this and perceptible in everyday life is the use of personalised advertising. However, this does not directly belong to the problem area of the function of prices and money, but is, as presented in the previous section, an element of the monetisation of data along the value chain. The same applies to the possibilities of a—correspondingly personalised—bundling of product or service offers, which is a more competition-theoretical problem.
- 27.
This means that through the better solution at the micro-level, the dividend, i.e. according to the Latin origin of the word “that which is to be distributed”, is greater overall at the macro-level, a connection that Hayek (1945) also pointed out.
- 28.
The argument is exaggerated in the sense that it makes a fundamental fact clear by generously simplifying it. The simplification here is that the underlying concept of freedom has not been discussed. This discussion was extensive even before digitalisation, even within the discourse on economic policy. For the purposes of the considerations presented here, it must suffice to point out that the possibilities of digitalisation have made an appropriate conception of precisely this concept of freedom more complicated than ever.
- 29.
See footnote 1 in Chap. 3 .
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Dötsch, J.J. (2024). A Functioning Price System. In: Economic Policy in the Digital Age. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-031-53047-0_4
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