Economics: Structural Reform:

Digital Revolution and Structural Reform of Stakeholders


by Professor Hiroshige Tanaka

Professor of Public Economics, Faculty of Economics, Chuo University

Tokyo Japan[1]


Link for Citation Purposes:



Digital revolution reforms the structure of markets by changing communication systems. Information of demand has become to be more influential on the distribution of goods and services. Before the digital revolution, the corporation has dominated the economic system by using one way communication mechanism. It is demonstrated that digital revolution partially reforms economic scheme to construct a two way communication mechanism. In this digital economic scheme the corporation is supposed to communicate with inside, outside and external stakeholders. We assume that innovation of ICT lowers transaction cost between the corporation and the outside stakeholder. This impact increases total stakeholders that the corporation need to communicate and enhances the weight of the outside stakeholders. Digital economies displace a decentralized system into the established centralized market economies.



Decentralized system, Digital Economies, External Stakeholder, Inside Stakeholder, Outside Stakeholder, Transaction Costs


1.     Introduction

Regarding the scope of markets activities globalized economies have brought benefits from enlarging scales of markets. Innovation of intelligent technologies beginning from the last decade of the 20th century has been decreasing costs of globalization for many corporations. Digital economies stimulate to develop global economies by raising the net benefit of global market economies. Tanaka (2019b) argues that innovation of ICT changes the structure of stakeholders. Innovation of ICT helps corporation appreciably respond to needs of each consumer and integrate many stakeholders cooperatively. This innovation diversifies connections of stakeholders to form supply and demand in the market. Eventually, the structural change of the market is expected to influence revolutionary on the social system. We should explore how this innovation affects not only supply and demand systems but also sustainability of societies. This investigation complementally develops the analyses on the decentralized social system of sustainability by Tanaka (2019a) and (2019b). Transaction costs in digital economies are defined by theoretical expressions. This paper reconstructs the traditional theory of industrial organization developed by Williamson (1975), (1986), (1990) and others to explore digital economies and mathematically makes clear how the structural reform of stakeholders influences sustainability of communities.


This paper is organized as follows.  2. expresses the structure of stakeholders to explore the digital economies. This section presents that digital revolution enlarges scope of the two way communication. This revolution is assumed to lower the transaction cost regarding outside stakeholder. 3. demonstrates that this revolution increases the total number of stakeholders and raises relative rate of outside stakeholder.


2.     Theoretical Framework of Digital Economies

Tanaka (2019a) comparatively explores influences of one way and two way communication for the sustainable mechanism. The one way communication scheme is efficient to convey large products and information acceding to top down procedure. Centralized scheme is exhibited by the one way communication mechanism. However, this communication scheme is not suitable to convey bottom up information. On the other hand, the two way communication scheme is appropriate to improve the facility of decentralized scheme. Tanaka (2019b) theoretically demonstrates that the decentralized scheme expresses lower economic production but obtains lesser social welfare losses than the centralized scheme. Tanaka (2019b) notices that evolution of digital economies displaces two way communication scheme in a large scale into the centralized constructed market economies. By exploring two way communication scheme, we could make clear some features of digitalizing societies.


We should provide some notations previously to proceed analysis. Stakeholders are divided into the stakeholders with market transactions and external stakeholders to obtain no economic relations. The former consists of inside and outside stakeholders. The inside stakeholders are represented by alliance members and stock owners and defined to obtain stronger or more intimate connections with the corporation than the outside stakeholders. The outside stakeholders are defined to have the market transactions with the corporation[2] and to obtain benefits exclude inside stakeholders from market related transactions. Globalization increases both outside and external stakeholders. In addition, the digital revolution enlarges outside stakeholders more rapidly than inside stakeholders[3].


Figure 1 exhibits the structure of stakeholders in digital economies. A to G represent stakeholders and and denote corporations. A to D have trusty relation with corporations and in the framework of market organization and are classified as inside stakeholders. Digital revolution inspires corporations and to proceed cooperation and improves two way communication in the inside stakeholders. Digital economies improve efficiency in communication between stakeholders E,F,H and corporations. Before the digital revolution external stakeholders are assumed to be E to H. After the revolution the external stakeholders except G turn into outside stakeholders. Figure 1 illustrates how digital revolution creates outside stakeholders. Stakeholder G is separated from communication of the market organization and receives external effects of the organization.

Figure 1 Structure of Stakeholders in Digital Economies


3. Digital Revolution and Outside Stakeholder

Figure 1 explicitly exhibits the effect of the digital revolution on stakeholder structure. In this paper we assume that digital revolution partially reforms centralized supply systems into decentralized scheme. Tanaka (2019b) describes notations for theoretical analyses as follows. The corporation performs production activity  and obtains the net private profit brings relations with  stakeholders. It takes the payment  for the stakeholder .  stakeholders are divided into inside stakeholders, 1, outside stakeholders,external stakeholders , Stakeholder has evaluation function  for performance of the corporation. In digital economies two way scheme could not allow each stakeholder i to free ride benefits of network. The stakeholder i needs to provide contribution to improve the network system.


We formalize theoretically the objective function NBby net benefit in the digital revolution the expression (1)[4].





denote weights of evaluation for the inside and outside stakeholders The corporation is assumed to share larger interest with the inside stakeholders than with outside stakeholders. Innovation of ICT decreases this communication gapes. It is assumed that raising effort of any stakeholders i could improve communication environment surrounding the corporation. When we employ the notation  we simply express the above argument by  Although Tanaka (2019b) provides optimal condition of  this paper explores how innovation transforms the structure of stakeholders.


Any inside stakeholder i (might be supposed to enhance the trusty connection with the corporation as the production increases.  is an increasing function of corporationroduction  It is assumed that  is written to be independent of the total effort The effect of communication is analyzed formally by using coefficients the inequality  holds for all  When we take no transaction cost with the stakeholder, the weight for the stakeholder is equal to one in the expression (1). If the corporation takes the transaction costs with the inside, the outside and the external stakeholders by   he transaction costs are written by






The corporation maximizes net benefit function (1) with  ,. The first order conditions of maximization are written by (2),(3),(4)[5].



,   .                                     (3)

,                                   (4)


To compare with (3) and (4), the contribution of the corporation on the external stakeholders is expressed formally by




To focus on the evolutional feature of digitalization, we assume that innovation of ICT makes stakeholders more openly or freely to move among three classes of stakeholders. We formally state Assumption 1.


Assumption 1. Stakeholder i would like to move from one to another class to obtain more payment


We consider that inside stakeholders are strongly connected with each other and that they are independent of the digital revolution. We present optimal payments of stakeholders (3), (4) and (5) by Figure 2. Marginal evaluations of inside and outside stakeholders are denoted




















by curves AD and BC.  is expressed by curve GG’. Digital revolution to increase y lowers  and moves downwardly EE’ to FF’. Digital revolution raises payments of outside stakeholder  to Supposing that the payments  of external and inside stakeholders are constant in the digital revolution, to behave as outside stakeholders is more attractive for other types of stakeholders. In particular, enlargement of internet services and sharing businesses promote to increase outside stakeholders.


3.     Concluding Remarks

In this paper, we argue that the transaction costs to be redefined in digital economies are an efficient method to explore the digital revolution. This paper makes clear that increasing outside stakeholders means enlargement of total stakeholders for the corporation to need to communicate. It is possible in this process that relative advantage of inside stakeholder lowers against outside stakeholder. Although many inside stakeholders might move into outside stakeholders, shareholder value approach by Tirole (2001) indicates that some inside stakeholders remain under the condition . However rising shareholder value possibly raises  for shrinking inside stakeholders. Considering external stakeholders, we could not conclude that the digital revolution could mitigate diversity of income distribution. Tanaka (2019a) indicates that decentralized scheme is needed to solve diversity problems.



Rifkin, J. (2014), The Zero Marginal Cost Society: The internet of Things, The Collaborative Commons, and The Eclipse of Capitalism. St. Martin’s Press, New York.

Tanaka, H. (2016), “The Sustainability Theorem in the ESG Mechanism.” Long Finance and London Accord, pp,1-29. Accessed 30 August 2019

Tanaka,H. (2017), “Sustainability of Global Communities and Regional Risk Governance”, Asia Pacific Journal of Regional Science 1, pp.639-653.

Tanaka, H. (2018), “Mechanism of Sustainability and Structure of Stakeholders in Regions, “Financial Forum, Vol 7 (1), pp.1-12.

Tanaka,H.(2019a), “Rehabilitation of the Decentralization in the Centralizing Process of Global Communities, “Journal of Global Issues and Solutions, Vol.19(3), may-june,pp.1-18.

Tanaka,H.(2019b), “Innovation on the Digital Economies and Sustainability of the Global Communities,” Annals of social sciences & management studies, Juniper 4( 2), pp.1-10.

Tanaka,H.(2019c),”Sustainable Governance of Marine Stakeholders,”Oceanography & Fisheries Open Access Journal, Juniper 11(1),pp.1-4.

Tirole J. (2001), Corporate Governance. Econometrica, 68(1), pp.1-35.

Williamson, O.E. (1975), Markets and Hierarchies :Analysis and Antitrust Implication. New York, NY: The Free Press.

Williamson, O.E.(1986), Economic Organization: Firms, Markets and Policy Control, Wheatsheaf Books, Brighton, UK.

 Williamson, O.E. (ed), (1990), Industrial Organization. Edward Elgar Publishing, Cheltenham, UK



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[1] Since April 1, 2020, author will be Professor Emeritus of Public Economics, Chuo University.

[2] Rifkin (2014) argues that innovation of the internet lowers the cost of production and distribution. This paper focuses on the effect that this innovation raise the new outside stakeholders.

[3] Tanaka (2019c) explores a relevant issue in oceanography problems.

[4] We write this expression by (2) in Tanaka (2019b) and simplify the discussion.

[5] In discussions on social systems, Tanaka( 2016), (2017),(2018) investigate the possibility that innovation raises the production levels and reduces social welfare losses.

[6] The evaluation function of the stakeholder i is supposed to be a concave function.