To what extent has the Internet made markets more competitive?
The Internet as we know it can be dated back to 1969. Originally conceived as a military research
project, the Internet rapidly developed over the second half of the 20th Century, transforming all
elements of human life. This transformation went as far as revolutionising economic markets.
However, whilst it is often assumed that the Internet has had a positive impact on markets (and in
particular competition) this may not actually be the case. In fact this has become an area of intense
discussion, and the European Commission is currently investigating Google for being in breach of
anti-trust laws.
In order to assess the impact of the Internet on competitiveness, it is necessary to define exactly
what perfect competition is, and what conditions are necessary for this. Perfect competition is a
theoretical market structure and is based upon the following conditions; all firms sell an identical
product; all firms are price takers - they cannot control the market price of their product; all firms
have a relatively small market share; buyers have complete information about the product being
sold and the prices charged by each firm; the industry is characterized by freedom of entry and exit.
Of course these conditions are never going to be met in a real economic market, but the closer a
market is to these, the more competitive it is. Thus to assess the impact of the Internet on
competitiveness, we must evaluate its impact on these different market conditions. In particular, the
Internet has had a great impact on entry barriers and information flow.
In order to comprehend the impact of the Internet on entry barriers, perhaps it is best to view it as a
production factor. In fact, the Internet can be viewed as a factor that is available to all industries and
all sectors at a low cost and is seemingly not a scarce resource. Thus, in theory, the Internet appears
to lower the cost of production, decreasing entry barriers and allowing more firms to enter the
market. This is obviously a positive. More firms entering the market allows for an increased number
of sellers, thus improving the market structure and making the market more competitive. This is
because traditionally the way to sell goods was via the high street, by renting/buying a shop,
employing salesmen and physically showing the consumer the good. However, with the Internet, a
firm can simply set up a free account on a website like Amazon and send their goods directly to the
consumer. Thus the Internet has drastically lowered capital requirements for entering a market in
many industries, allowing the producer to get to the consumer more cheaply. Not only are the
requirements for capital much lower, but the Internet has also created the means of easily attracting
mass investment through crowd-funding. This relatively new phenomenon has taken advantage of
the mass nature of the Internet in order to allow everyday people to donate small amounts of
money to start-up projects. Thus the Internet has had a two-fold effect on capital requirements,
both increasing access to funding and lowering the amount of funds required.
Another way in which the Internet has affected entry barriers to markets is through impacting the
barrier of branding. However, unlike the effect on capital requirements, this effect is less clear-cut.
Brands are attractive for two reasons - they offer recognition and they offer security of quality.
Whilst the Internet has had little impact on the former, it has greatly affected the latter. The Internet
has spawned many websites like Amazon and Ebay which allow users to sell goods through their site.
These sites offer the consumer some protection and security. In many cases Amazon/Ebay is able to
refund the consumer if the good is faulty or of poor quality. Thus with these websites offering
security, there is not as much need for brands, thus lowering that particular entry barrier. Moreover,
The Internet as we know it can be dated back to 1969. Originally conceived as a military research
project, the Internet rapidly developed over the second half of the 20th Century, transforming all
elements of human life. This transformation went as far as revolutionising economic markets.
However, whilst it is often assumed that the Internet has had a positive impact on markets (and in
particular competition) this may not actually be the case. In fact this has become an area of intense
discussion, and the European Commission is currently investigating Google for being in breach of
anti-trust laws.
In order to assess the impact of the Internet on competitiveness, it is necessary to define exactly
what perfect competition is, and what conditions are necessary for this. Perfect competition is a
theoretical market structure and is based upon the following conditions; all firms sell an identical
product; all firms are price takers - they cannot control the market price of their product; all firms
have a relatively small market share; buyers have complete information about the product being
sold and the prices charged by each firm; the industry is characterized by freedom of entry and exit.
Of course these conditions are never going to be met in a real economic market, but the closer a
market is to these, the more competitive it is. Thus to assess the impact of the Internet on
competitiveness, we must evaluate its impact on these different market conditions. In particular, the
Internet has had a great impact on entry barriers and information flow.
In order to comprehend the impact of the Internet on entry barriers, perhaps it is best to view it as a
production factor. In fact, the Internet can be viewed as a factor that is available to all industries and
all sectors at a low cost and is seemingly not a scarce resource. Thus, in theory, the Internet appears
to lower the cost of production, decreasing entry barriers and allowing more firms to enter the
market. This is obviously a positive. More firms entering the market allows for an increased number
of sellers, thus improving the market structure and making the market more competitive. This is
because traditionally the way to sell goods was via the high street, by renting/buying a shop,
employing salesmen and physically showing the consumer the good. However, with the Internet, a
firm can simply set up a free account on a website like Amazon and send their goods directly to the
consumer. Thus the Internet has drastically lowered capital requirements for entering a market in
many industries, allowing the producer to get to the consumer more cheaply. Not only are the
requirements for capital much lower, but the Internet has also created the means of easily attracting
mass investment through crowd-funding. This relatively new phenomenon has taken advantage of
the mass nature of the Internet in order to allow everyday people to donate small amounts of
money to start-up projects. Thus the Internet has had a two-fold effect on capital requirements,
both increasing access to funding and lowering the amount of funds required.
Another way in which the Internet has affected entry barriers to markets is through impacting the
barrier of branding. However, unlike the effect on capital requirements, this effect is less clear-cut.
Brands are attractive for two reasons - they offer recognition and they offer security of quality.
Whilst the Internet has had little impact on the former, it has greatly affected the latter. The Internet
has spawned many websites like Amazon and Ebay which allow users to sell goods through their site.
These sites offer the consumer some protection and security. In many cases Amazon/Ebay is able to
refund the consumer if the good is faulty or of poor quality. Thus with these websites offering
security, there is not as much need for brands, thus lowering that particular entry barrier. Moreover,
