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.