Perfect Competition and the Internet It has been argued in recent years that the explosive growth of retailing on the Internet has made this form of retailing resemble an almost perfectly competitive market. Consumers appear to have perfect information about both prices and products at their fingertips by merely logging onto the net in search of the best deals. In a perfectly competitive market products are identical, there are a large number of buyers and sellers, there are no search costs, customers are perfectly informed, there is free entry into and exit out of the industry, and profit margins would be ‘normal’ in the long run. The Internet does seem to have some of these attributes of a perfect market. For example, studies have shown that online retailers tend to be cheaper than conventional retailers and that they adjust prices more finely and more often. The Internet has also led to the growth of people who use ‘shopbots’, that is computer programs that search rapidly over many websites for the best deal. These provide customers with a more complete knowledge of the market, hence minimizing search costs. In addition, entry and exit from Internet sites is relatively easy for sellers so there are no obvious barriers to entry. Under these conditions one would expect prices for the same or similar products to be virtually identical on the Internet, as under perfect competition. However, a closer study of the Internet retail market shows that there may still be important elements of imperfection in the market. Studies in the USA by the Sloan School of Management have shown that there is still an element of price dispersion (i.e. difference between the highest and lowest prices for a given product or service) in Internet retail markets. This would tend to indicate that the Internet retail market is inefficient, with some retailers still being able to charge more than others. For example, price dispersion for identical books and for CDs and software amongst different online retailers can differ by as much as 33% and 25% respectively. Researchers at the Wharton School in Pennsylvania found that airline tickets from online travel agents differed by an average of 28%! Questions 1. Why does a degree of price dispersion suggest that we do not have a perfect market? 2. What factors might explain why various retailers can still charge different prices for the same product over the Internet, despite the claim that it resembles a perfect market?
Perfect Competition and the Internet
It has been argued in recent years that the explosive growth of retailing on the Internet has made this form of retailing resemble an almost
The Internet does seem to have some of these attributes of a perfect market. For example, studies have shown that online retailers tend to be cheaper than conventional retailers and that they adjust prices more finely and more often. The Internet has also led to the growth of people who use ‘shopbots’, that is computer programs that search rapidly over many websites for the best deal. These provide customers with a more complete knowledge of the market, hence minimizing search costs. In addition, entry and exit from Internet sites is relatively easy for sellers so there are no obvious barriers to entry. Under these conditions one would expect prices for the same or similar products to be virtually identical on the Internet, as under perfect competition.
However, a closer study of the Internet retail market shows that there may still be important elements of imperfection in the market. Studies in the USA by the Sloan School of Management have shown that there is still an element of
Researchers at the Wharton School in Pennsylvania found that airline tickets from online travel agents differed by an average of 28%!
Questions
1. Why does a degree of price dispersion suggest that we do not have a perfect market?
2. What factors might explain why various retailers can still charge different prices for the same product over the Internet, despite the claim that it resembles a perfect market?
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