[LINK] Internet commerce will foster price competition
david.boxall at hunterlink.net.au
Mon Nov 21 14:35:59 AEDT 2011
Ross Gittins gives an economist's perspective.
November 21, 2011
The critics of economists often accuse them of trying to change the
world to make it more like their textbooks. But now the mountain is
coming to Muhammad. The internet, and the electronic commerce it
promotes, is making real-life markets work more the way economists
assume they do.
As the retailers - particularly the department stores - have sought to
explain the weak growth in their sales, their gaze has fallen on the
internet. The high dollar has made it more attractive for people to buy
stuff on the net from overseas sites. And people who buy from foreign
sites don't have to pay goods and services tax on purchases of less than
As an explanation for their weak sales, it's not persuasive. The share
of consumer spending accounted for by internet purchases is still quite
small. The more likely explanation is simply a shift in consumer
preferences from goods to services.
But internet purchases will become a significant competitive challenge
to retailers as people get more experienced at and relaxed about
internet shopping. (And as Australia Post gets better at delivering
parcels to households without a stay-at-home spouse.)
It's a mistake, however, to imagine it's primarily the high dollar that
will drive this trend (or that the presence or absence of a 10 per cent
GST makes much difference). No, the primary source of internet bargains
is the existence of what economists call ''price discrimination'': the
longstanding practice of international suppliers charging higher prices
in some markets than others.
Global firms selling books, music, DVDs, software, sneakers and much
else know the punters' ''willingness to pay'' varies greatly between
countries. Why? Because, for instance, Aussies are simply used to paying
higher prices than Americans are.
Such price discrimination is a great way to maximise profits - provided
you can keep the various markets separate and stop people in high-price
markets switching their purchases to low-price markets.
Various global industries have long used legislated restrictions on
''parallel imports'' to protect their price discrimination arrangements
- against which economic rationalists have long fought mainly losing
battles. But all that legal protection is being swept away as the
internet provides us with direct and easy access to cheaper American
goods. This will put a lot of pressure on Australian retailers (and
their foreign suppliers and landlords) to lower their prices.
Cyberspace breaks down the natural protection provided by oceans and
geographic distance (although, of course, this becomes less true as the
bulkiness of the goods in question increases, making transportation over
long distances uneconomic).
So it breaks down barriers between certain geographic markets and also
breaks down barriers to firms entering a particular market. If you're a
big, established player in a physical market, it's very hard for me to
start up in competition with you and get myself noticed. In cyberspace,
however, a web browser that finds your huge site will list my bedroom
operation beside it. It takes the punter only a few clicks to check me
out after he's checked you out. Since I don't have the brand recognition
you have, my price may well be 5 or 10 per cent lower. I can't charge a
premium for my established reputation for quality and reliability.
In its basic form, the economists' model assumes there's no cost in
money or time to gather all the information you need to be a fully
informed buyer or seller in a market. In reality, there's often a lot of
So much so that the possession of information is often ''asymmetric'' -
the seller knows a lot more about what's what than the buyer does. This
asymmetry tends to favour (professional) business over (amateur) punters
(except in the labour market, where a worker knows far more about their
personal strengths and weaknesses than a potential employer does).
Clearly, the internet greatly reduces the cost of gathering information
so as to make better-informed decisions. This should reduce the
asymmetry of information, thus shifting reality closer to the model.
The economists' model focuses on price - the price of the item in
question relative to other prices - as the key to how markets work. It
assumes relative prices (''incentives'') are the only motivator and that
all competition is price competition.
In reality, oligopolies much prefer non-price competition via
advertising, marketing (such as the nature of the packaging) and
merchandising (where and how you display items in your store).
On the internet, many of these non-price devices are a lot less
''salient'' (prominent), thus making prices more salient. And the
internet is a lot better at gathering and comparing price information
than information about qualitative considerations.
According to a psychology experiment, when people face a choice between
an interesting job paying $80,000 a year and a boring job paying
$90,000, most choose the boring one. That's not because they're
money-hungry, but because of the limits to our neural processing power:
we focus on the numerical comparison because it's a lot easier than the
Information technology makes it a lot easier and less costly for firms
to adjust their prices (while allowing them to collect better
information about the right direction and size of those adjustments).
So it's likely the more commerce we do on the net, the more importance
will be attached to price - just as the economists have always assumed.
David Boxall | Drink no longer water,
| but use a little wine
http://david.boxall.id.au | for thy stomach's sake ...
| King James Bible
| 1 Timothy 5:23
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