BUAD 307





04--Reality of online economics and competition

PowerPoint Narration

There are a number of economic realities of online competition:

  • As discussed, costs of handling online orders is often higher than that of distributing through traditional stores.
  • Even if online selling is more cost effective in some situations, a firm selling online will, in the long run, be competing with other online merchants—not just against traditional “brick-and-mortar” stores.  By the forces of supply and demand, online prices will then be driven down so that the profit from selling online will be no greater than that from traditional retailing.  Any reduced costs would then be expected to go to customers.
  • Competition will be greater for products that have large markets than for those where markets are smaller and more specialized.  Amazon.com, for example, has found it necessary to discount best selling books deeply.  Higher prices—closer to the list price—can be charged for specialty books, but for a large part of the market, competition will be intense.
  • A new online merchant will face competition from established traditional merchants.  These will often have the cash reserves to stay in business for a long time even with temporary competition.  The online merchant, if it has no cash reserves other than stockholders’ investment, may run out of cash before it can become profitable.


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