The Economics of Internet Markets

Competition Policy & Antitrust and Internet

Article Snapshot

Author(s)

Jonathan Levin

Source

NBER Working Paper #16852, 2011

Summary

This paper considers Internet markets through the lens of economic theory and surveys some empirical findings.

Policy Relevance

Internet platforms have lower “switching” costs for consumers than traditional markets, and antitrust regulations might take this into consideration when they consider the costs to consumers of monopolies in some Internet industries.

Main Points

  • Internet markets are characterized by scalability; customizability; rapid innovation; and the collection of massive amounts of consumer and market data.

    • Firms can very quickly and cheaply scale up operations; for example, Facebook has only one engineer for every million users.
       
    • Products and advertisements can be recommended for specific consumers based on their past purchasing or browsing history.
       
    • Firms rapidly and cheaply create and deploy new products.  Additionally, it’s cheap to improve existing products; Amazon can easily change the layout of their storefront, and Google can invisibly improve their search algorithm.
       
  • Many Internet markets are characterized by competing platforms, intermediaries that bring together different types of users who complement each other; for example, Google brings together advertisers and search users.

    • These markets tend to tip, in the sense that often one platform will often capture most users.
       
    • But slightly different platforms proliferate on the Internet more frequently than in traditional markets.  For example, a consumer can search for used goods on eBay or Craigslist or Amazon, all dominant platforms in specific areas.
       
  • Novel market mechanisms like reputation ratings and user reviews have emerged to solve novel problems related to relative seller anonymity.
     
  • Consumers are able to compare prices more easily, which might be expected to decrease price variation between lenders; but, lenders may have responded by obfuscating their prices.
     
  • Long-tail supply strategies have become more feasible; that is, firms can cheaply provide a wider variety of products. Consumers seem to be making more niche purchases.

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