Miklos Sarvary

When and How Is the Internet Likely to Decrease Price Competition?

Coauthor(s): R. Lal.

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Abstract:
Marketers all over the world agree that the Internet will have a major impact on the way firms do business. What changes will exactly occur, however, is hard to predict as the Internet is in a phase of rapid growth and constant change. Patterns are difficult to isolate, especially since despite its explosive growth, today, the Net is still in its infancy, only being available to a small proportion of people. In spite of this general lack of reliable patterns, one consensus among managers seems to be that the Internet is likely to intensify price competition. In essence, the conventional wisdom seems to be that the Internet lowers the cost of distribution and the cost of consumer search, thereby lowering barriers to entry, and thus "creating the closest thing yet to Adam Smith's perfect competition." Under what conditions can firms raise prices and increase profits by using the Internet as a complementary channel of distribution, despite its lower costs of distribution and search? Furthermore, should the Internet ever be used if the cost of distribution is higher?

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