A Simple Economic Model to Explain Different Digitization Patterns

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.