Lessons about Markets from the Internet

Networks, the Internet, and Cloud Computing and Internet

Article Snapshot

Author(s)

Glenn Ellison and Sarah Fisher Ellison

Source

Journal of Economic Perspectives, Vol. 19, No. 2, pp. 139-158, 2005

Summary

This paper looks at what economists have learned from the Internet.

Policy Relevance

Economists have learned more about the importance of variety to consumers, as well as factors that limit price competition between online merchants.

Main Points

  • The Internet has affected how economists think by giving them a chance to study how markets work in detail, conduct experiments, observe rapid change, and record data.

  • Economists know that some markets become highly concentrated, like great trade fairs in medieval times; some predicted that the Internet would lead to similar results.
    • Some sites that cater to consumers, like eBay and Amazon.com, have become concentrated, perhaps because consumers value product variety.
    • Many sites that cater to businesses have not become so concentrated, suggesting that variety matter less.
    • In two-sided markets, one provider serves two (or more) different kinds of consumers. Visa credit card services (consumers and retailers), Microsoft’s operating system, and Google.

  • Some thought the Internet would lead to fierce price competition because consumers could easily find the lowest price. But prices vary and retailers still price above cost. Quality differences, branding, and other factors limit the effect of price competition.

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