Big Data and artificial intelligence are two phenomena that will shape social and economic development in the coming decades. This can have considerable advantages for consumers.
Big Data and AI – What is it all about?
Big Data is more than just a large amount of data. Big Data is a volume of data that is characterized by three properties: It is (1.) a particularly large amount of data (volume), which (2.) consists of different, non-standardized data (variety) – i.e. has many data sources and consists of different types of data (text, video, audio) – and which (3.) is analyzed so quickly (velocity) that conventional database software tools cannot perform these analyses.
The term “artificial intelligence” (hereinafter referred to as AI) describes the ability of computers and machines to solve cognitive activities such as solving problems and making decisions independently. This also includes the ability to learn autonomously. As a result, IT experts no longer have to program the entire behavior of IT systems.
Big Data and AI form a unit (see Fig. 1):
- On the one hand, large amounts of non-standardized data can not be analyzed without AI. Seen in this light, Big Data is worthless without AI.
- On the other hand, AI is useless without a data set to be processed. For small data sets, which consist only of numbers in an Excel table, the use of AI – i.e. the associated hardware and software – is not economically efficient.
Economic benefits of Big Data and AI
#1 Optimization of business processes
The systematic analysis of Big Data by AI can help to make economic decision-making and production processes faster, more precise and more reliable:
- Big Data algorithms can detect commercially relevant relationships, e.g. between the weather and purchasing behavior or between people’s living conditions and their credit risk. This makes it easier to identify and avoid business risks.
- The optimization of internal business processes through greater transparency reduces the costs of production. For example, increasing transparency regarding the entire material flow of a company ensures that inventories and safety stocks are lower. This reduces storage costs.
- In addition, the algorithmization accelerates numerous operational processes (e.g. product development, administration, trade and sales, but also the entire procurement system).
All these optimizations of business processes ultimately mean a reduction in administrative and decision-making costs respectively all costs of production for existing products. Lower costs of production usually result in lower prices. Normally, consumers react to falling prices with higher demand. Companies adapt to this demand. For consumers, this means an improvement in the supply of goods and services.
#2 Reduction of transaction costs
The exchange of goods and services via markets is associated with costs. Companies have to pay for advertising in order to sell their products. Consumers have to spend time selecting the products that best meet their needs from the multitude of offers available. In addition, companies need to know what product features customers want before they start production. The market research required for this also involves costs.
Big Data and AI can reduce these costs through multiple channels:
- The systematic evaluation of purchasing behavior gives companies an indication of the characteristics consumers expect from goods and services.
- Personalized advertising, which takes into account people’s previous purchasing behavior, means targeted customer information about existing offers.
- Digital platforms with evaluation options for providers and their products increase market transparency for customers and thus make it easier for them to decide on the right product.
Online banking and other e-payment systems facilitate the costs associated with financing exchange activities.
These measures reduce the time it takes for customers to find the right product. Companies spend less money on market research and advertising. Reducing the costs of exchanging goods and services via markets – economists call this a reduction in transaction costs – means a further price reduction for existing goods and services. In combination with offers that correspond to the preferences of consumers, this implies a further improvement in the supply of goods to consumers.
#3 Optimization of existing products
Big Data and AI can also improve the quality of existing products. If companies systematically analyze people’s search and purchase behavior on the Internet, they can gain a better understanding of differentiated customer wishes. The result is the optimization of the offered products through a better adaptation to individual customer needs.
In addition, the adaptation of the products to the customer’s wishes reduces subsequent im-provement requests and necessary reactions to complaints. For companies, this has the effect of reducing the costs of production and allows lower market prices.
#4 New product development
Big Data and AI enable the development of new products and services, especially in the context of online markets or platform markets. Digital platform markets connect two or more groups of market players and enable market transactions that would only be possible at significantly higher transaction costs without this platform.
A well-known example of such a new offer is Airbnb. This platform brings together apartment owners and tenants and thus lowers search costs for both sides. Airbnb also han-dles the payment. This ensures that the apartment owner receives the contractually agreed money. The tenant can assume that for its money also actually a dwelling is placed to it at the disposal. Finally the possibility that landlords and tenants can evaluate each other provides for the fact that other residential properties and tenants receive more information about the quality of potential tenants and landlords. All these services have the effect of reducing the cost of organizing a temporary tenancy.
Closely linked to the concept of the platform economy is the trend towards a sharing economy. This means that consumers no longer buy certain products themselves, but rent them for a certain period of time. A prominent example of this is Car-Sharing. For consumers who opt for this concept, the Sharing Economy means an increase in utility: they can use the desired quantity of goods at a lower price be-cause they do not have to bear the entire cost of buying the goods, but only proportionate costs. The income parts saved in this way increase the purchasing power of consumers and can be spent on other goods and services.
The economic benefits for consumers of the four elements described here are summarized in Figure 2.
All in all, Big Data and AI can significantly increase the material well-being of individuals. However, this must not block the view on critical aspects. This includes, among other things, the question of how people’s privacy can be protected. In addition, price reductions only come into effect if the monopoly tendencies described in a previous blog post can be prevented. If these problems are solved, Big Data and AI will improve individual welfare.