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.