Competition
Competition and Market Organization
Today's Internet users may be different from the general population
in many ways, until the majority of the populations participate in the
market. However, electronic commerce as a marketplace differs fundamentally
from other physical markets in many respects. For example, the size
of a firm is not a significant factor in establishing one's presence
in the virtual marketplace. Big and small companies can be located side
by side with no difference in shop floors or interior decorations. Consumers
can search for product information and compare prices over the whole
Internet where geographical distance plays no role. From an economics
perspective, electronic commerce has many characteristics of a perfectly
competitive market. Although perfect competition has been the basis
of most economic studies by which we evaluate economic efficiency, it
is far more an exception in real life than the norm. Electronic commerce
presents an experimental stage to further realize the economic efficiency
of a competitive market. Both economists and government regulators use
perfect competition as a benchmark against which market efficiency is
judged. In a perfectly competitive market, a commodity is produced for
which the consumer's willingness to pay equals the marginal cost of
producing the commodity, and neither sellers nor buyers can influence
supply or demand conditions individually or collectively. A society
cannot improve its economic welfare by deviating from competitive markets.
However, perfect competition is seldom evident in real markets because
it requires that several assumptions be met. Among the assumptions are:
Many potential buyers and sellers must be able to enter and exit the
market at no cost (no barriers to entry)
There are many sellers and buyers who cannot individually influence
the market (price takers)
Products are homogeneous (no product differentiation)
Buyers and sellers both know the price and quality of the product (perfect
information). Although wholesale agricultural markets are often cited
as one example of a perfectly competitive market, in most other markets
one of the above assumptions, will not be met. Heavy investment requirements
in manufacturing facilities and R&D often limit free entry by competitors.
Advertising also influences consumer behavior by changing demand preferences
or establishing reputation, which gives sellers a degree of market power.
To exploit taste differences among buyers, firms sell differentiated
products by brands or by quality, which as a result limits the competitive
effects on prices. Finally, both sellers and buyers have limited information
about demand and product quality given that it is costly to learn about
product quality, prices, and even the location of shops. Indeed, if
sellers and buyers were perfectly informed, there would be no need for
advertising, marketing, or sales efforts. Even at a quick glance, the
electronic marketplace better resembles the abstract market of many
sellers and buyers in which prices are determined efficiently by supply
and demand. The most important differences are lowered barriers to entry
(low overhead costs) and the opportunity to search and obtain perfect
information about products and demand.