favorable prices. For instance, Internet prices for books and CDs tend to be 9
to 16 percent lower than traditional retail prices. New automobile prices are
about 2 percent lower on average to buyers who enlist online comparison and
referral services. Online insurance fees and brokerage charges are lower than
charges for similar storefront products and services (and over time tend to
exert downward pressure on storefront prices). Internet prices also display less
dispersion than do retail prices. (However, online price dispersion persists.
Competition is not so intense that all sellers are forced to charge the same mar-
ket price.)
Second, the Internet increases the geographic range of markets and the
variety of items sold in those markets. Hundreds of fragmented transactions
are readily enlisted in unified markets. For example, a consumer could expend
the time and effort to find a used copy of a John Grisham legal mystery by
going to several bookstores and paying about $4.50 (half the new price in
paperback). Or the consumer could use the Internet’s unified used book mar-
ket, where scores of the same title sell for about $3.50, shipping included. The
important point is that unified markets directly increase overall economic effi-
ciency. However, unified markets need not always imply lower prices. For
instance, with numerous buyers seeking scarce copies of original Nancy Drew
mysteries (dust jackets intact), the Internet price averages $20 to $30 per copy.
By comparison, the rare buyer who is lucky enough to find the same book on
a bookstore shelf might pay only $5 to $15. As always the price effect of mov-
ing to a unified market depends on the relative increases in supply versus
demand. An additional key benefit of online markets is greater product variety.
One research study discovered that some 45 percent of all books sold online at
Amazon were “rare” titles (ranked below the top 100,000). Using fitted demand
curves, the study estimated the associated consumer surplus for these purchases
with dramatic results. Consumer surplus averaged about 70 percent of the pur-
chase price of each rare title. In total, the ability to find a wide variety of rare
books was worth about $1 billion in 2000. By comparison, Amazon’s low prices
saved consumers about $100 million. Item variety proved to be worth 10 times
more than price reductions.
Third, in many important instances, a firm’s use of the Internet lowers
costs: from finding and serving customers to ordering and procuring inputs,
to lowering inventories. Selling online also may reduce the need for “bricks-
and-mortar” investments, and online promotion and marketing may take the
place of a direct sales force. Specific examples of cost savings abound: The
cost of selling an airline ticket online is $20 cheaper than the cost of selling
through a travel agent. Online automobile sales reduce the need for dealer-
ships and vehicle inventories. Online stock trades are much less costly than
brokered trades. Just as important, the Internet lowers the internal costs of
the firm—by serving as a platform for sharing and disseminating informa-
tion throughout the firm and for better managing all aspects of the supply
chain. Of course, each firm is constantly in pursuit of lower costs—via online304 Chapter 7 Perfect Competitionc07PerfectCompetition.qxd 9/29/11 1:30 PM Page 304