This was a recent essay title we were given in class (Edexcel Unit 3: Business Economics) which I thought was quite an interesting topic. Below is my essay, where I have mainly focused on 3/4 points as to why I think the internet is creating markets near to the model of perfect competition and them some evaluative points. Please add a comment in you have any other suggestions or evaluation points.

Perfect competition is a market type which meets certain criterion. This criteria is that there are many buyers and sellers, sellers are price takers, there is perfect information known by consumers, there are no barriers to entry, the product is homogeneous  firms are profit maximisers and there are no externalities.

Due to the relative cheapness of purchasing a website the internet could be considered to have low barriers to entry. There aren’t any restrictions on who can set-up on the internet and the costs are a lot lower than that of a shop. Costs associated with a shop include rent, gas and electricity, fittings and appliances, stocking the shop and staff costs. Here things like rent, gas and electricity are sunk costs and so will never be recovered. On the other hand with the internet the costs are purchasing a domain name and hosting package and then perhaps paying someone to design and build the site. However there are still sunk costs associated with this, such as the domain name (which one is effectively renting) and the hosting package. Sellers may also have to spend a lot of money designing a good, user friendly website to compete with other websites and make it easy for all customers to use. The firm may still have staff costs as it may have to hire people to deal with online inquiries and questions and the firm may have to spend a lot of money on advertising in order to attract people to its site, particularly because it doesn’t have a physical presence like if it were located down a High Street.

Due to the internet’s popularity there are also lots of buyers and sellers. Because of this there isn’t really one buyer or seller that is big or powerful enough to demand a price, hence making the sellers price takers and dependent on the market demand curve. This is particularly true with homogeneous products (for example like items that are sold on ebay) but not so much with branded goods that are only sold by one retailer. Large retailers like Amazon and Play.com have a large share of the market so this may not be considered perfect competition however they do appear to be competing with each other and driving prices down/ Also only 17.5% of retail sales are conducted online (in the UK) showing that there are more participants in the convention High Street retail sector.

On the internet there are many price comparison sits, consumer blogs and micro-blogging sites which allow consumers to garner information about the cheapest and highest quality products and services. They can also use seller rating feedback which due to the threat of a bad rating encourages sellers to offer good customer service. The price comparison sites and search engines allow consumers to search for the lowest price for a good and purchase from that site making sellers price takers. This point could therefore be seen as meeting the criterion of perfect information. Although not all firms and sites will be on price comparison sites and the firms that are may be larger firms hence encouraging a few sellers which goes against the condition of perfect competition.

There may also not be more than one seller of a good and hence consumers may purchasing this good regardless of the price showing that if the good isn’t homogeneous then it may have an inelastic demand curve. Also negative seller ratings can be detrimental to sellers and they may have to spend a lot of money on promotion and customer service to ensure that they receive positive feedback, hence increasing the barriers to entry.

To conclude I think that the internet can be seen as creating markets that lead more towards perfect competition however I believe that the market is still better described as monopolistic-ally competitive. This is mainly because not all products are homogeneous and so consumers may prefer the differentiated branded goods offered by single firms, which meets the criteria of monopolistic competition of which I believe the internet is situated in.