TikTok's E-Commerce Spell: Breaking Free from the Addictive Grip

 Ever found yourself endlessly scrolling through TikTok, only to emerge hours later with a cart full of items you never knew you needed? But wait, is TikTok more than just a platform for entertainment? Could it be secretly transforming into a powerhouse of addictive e-commerce?

In the world of TikTok, there's a fascinating parallel to gambling addiction: the constant rush of dopamine. Each video scroll triggers a little hit of this ‘happy dose’ in your brain. Over time, your brain gets hooked on this sensation, craving more and more – a phenomenon often dubbed "dopamine addiction". And that's why people find themselves repeatedly drawn back to the platform, seeking that next dopamine.

(Starr, n.d.) Retrieved from: Plann

Shockingly, 71.2% of TikTok users reported making a purchase after discovering something captivating in their feed or stories, while 50% have been spurred to buy by watching TikTok Live sessions. In fact, TikTok Live has successfully prompted half of its viewers to make a purchase (Honeybill, n.d).

TikTok's Consumer Craze: Decoding Preferences and Shopping Patterns in the ECommerce Era

So, how exactly does using TikTok as an e-commerce relate to economic theory? Well, just with a single click, consumers find TikTok a convincing platform to shop. Thanks to the algorithm-driven content, the TikTok feed relies heavily on the understanding of consumers based on the comment, likes and shares. This makes consumers find it convenient to shop with TikTok, and what economics calls consumer preferences. The utility consumers get from using TikTok are maximised due to the lower price offered in TikTok.

If you are an easily influenced person, TikTok might not be the safe shopping place for you. Consumers tend to buy unnecessary items after being promoted by an influencer or celebrity and the study by Malabanan (2023) supported this analysis. Simply put, behavioural economics explains this bias in decision making can put consumers in ‘danger’ of overspending.

Beyond maximising utility, TikTok may inadvertently foster adverse selection, such as the fake and low-quality products, mirroring the platform's wider issue of misinformation fuelled by consumers' lack of accurate information. 

TikTok's Dark Side: Unveiling the Hidden Costs for Consumers and Producers

Let’s think about one question, could you escape from discounts or vouchers when purchasing? TikTok opens doors for commerce by live streaming of influencers and the TikTok shop, offering lower prices to attract consumers. This inevitably leads to impulse buying, defined as unplanned purchases that are the result of stimulus and decided on the spot. TikTok specifies that more than half of the users on the application, around 67%, motivate to shop when they have no intention of doing so, 74% of its audience inspire to know more about brand or product, and 66% make decisions on what to buy with the assistance of TikTok (Teo et al., 2023).

Impulse buying led to irrational hoarding and waste of social resources, thereby resulting in disorder or even paralysis of the retail industry. Therefore, market failure occurs when there’s an inefficient allocation of resources in the market.

Have you ever considered what is behind lower product prices? TikTok provides a platform for many sellers, especially smaller or independent ones, to reach a vast audience with minimal entry barriers. This increases competition in the market, potentially driving down prices and forcing other sellers to innovate or improve their marketing strategies to stay competitive. Negative externalities of TikTok as e-commerce exist, imposing harmful effects on third parties.

Graph 1: Negative externalities of TikTok as e-commerce, Source: Original

The graph above illustrates negative externalities by higher marginal social cost (MSC) than marginal private cost (MPC). Originally, consumers who purchase on Tiktok received a price at PC and producers sold products at Qc. However, with the negative impact on the market and users’ spending pattern imposed by TikTok, price increased from PC to Pm while quantity produced dropped to Qm where MSC intersects consumer demand. The initial price was lower because firms in TikTok do not face variable cost (no such physical store), thus, marginal cost equals zero. Market failure was illustrated by the shaded area, which was the sum of consumer surplus and producer surplus.

How to be TikTok-addict free: addressing the market failure

Thinking about kicking the TikTok addiction and fixing the market mess it’s causing? The proposal to introduce government regulation—specifically, a tax on purchases made through TikTok—emerges as a beacon of hope. Don’t worry, there is no market failure after the imposition of the tax because consumers will opt for the cheaper price where MSC equals MSB, at the social optimum point with price at Pm and quantity at Qm in Graph 2.

Here’s the deal in plain speak: when the government imposes this tax, TikTok prices rise and consumption decreases. The graph 2 below illustrates this expectation. Post-tax, folks might start thinking twice because things aren’t as cheap as they used to be. In this case, after stipulation, the marginal cost becomes the new price, whereas the new price we see includes what we used to pay plus the tax, showing the true cost of keeping our TikTok habits going.

Graph 2: Regulation on the negative externalities of TikTok as e-commerce, Source:

Original

TikTok's Market Dynamics: From Dominance to the Need for Regulation

So, everyone believes that TikTok is the king of the social media jungle. It's not by luck; when you dig further, there are numerous reasons why it ranks first. Consider the unlimited variety of videos, the innovative improvements that are constantly released, and the buzzing user community; all these elements combine to make TikTok extremely addicting.

However, it's not all sunshine and rainbows. TikTok's negative externalities and the impact of consumer choices on TikTok as an e-commerce platform have resulted in a market failure necessitating strategic intervention. It's past time we stepped in with some reasonable rules to ensure that the online shopping game is fair for everyone. Let's level the e-commerce playing field on TikTok and beyond so that everyone wins.

References:

Honeybill, R. (n.d) Tiktok Shop Statistics: 2023 Data Analysis, Root. https://rootdigital.co.uk/blog/tiktok-shop-statistics/#

Malabanan, A.M.P. (2023) consumers’ attitude towards online shopping: tiktok platform shops in the philippines, Tallinn University Of Technology, pp39.

Starr, L. (n.d) How to increase sales for your eCommerce brand with the power of TikTok, Plann. https://www.plannthat.com/tiktok-for-ecommerce-sales/

Teo, S.C., Tee, W.Y. and Liew, T.W. (2023) Exploring the tiktok influences on consumer impulsive purchase behaviour, International Journal of Business and Society, 24(1), pp. 39-55, https://publisher.unimas.my/ojs/index.php/IJBS/article/view/5600