1、 The Journal of economic perspectives Author: Yannis Bakos stern school of businessnew york universityOnling retail sales of goods and services are projected to grow from $45 billion in 2000,or 1.5% of total retail sales,to $155 billion in 2003,and to $269 billion in 2005,or 7.8% of total retail sal
2、es projected for that year. in addition to this substantial growth in online sales,consumers increasingly rely on information collected online to research a lot of purchases that are concluded over traditionalbricks and mortarchannels,especially for high value durable goods. sush as electronics and
3、automobiles. sush purchases influenced by the internet are estimated to grow form $13 billion in 2000 to $146 billion in 2003 and $378 billion in 2005,or 10.8% of projected retail sales. This would bring the total retail sales affected by e-commerce in 2005 to $647 billion,or 18.5% of total retail s
4、ales.Retail e-commerce is evolving to encompass a wide variety of goods and services.Leisure travel will be the leading category in 2000 with 27.2% of online sales,followed by books,music,videos and software（14.9%）, computers and eleputers（13.6%） and apparel（11.3%）.By 2005, consumables（food, beverag
5、es, supplies, health and beauty aids,pet supplies,etc） are projected to amount to 18% of online retail sales,followed by apparel（16%）,computers and electronics （12.4%）, automobiles （12.2%） and leisure travel（12.1%）, while the share of books, music,videos and software will fall to 9.6%.Given the grow
6、ing role that the e-commerce will paly in retail markets,this paper focuses on how the Internet is affecting these markets,and how the resulting “digital markets”compare to conventional markets in terms of search costs,patterns of competition,mechanisms for price discovery,and types of intermediatio
7、n.Reducing Search Costs For Buyers and SellersBuyers face search costs in obtaining and processing information about the prices and product features of seller offerings.These costs include the opportunity cost of time spent searching,as well as associated expenditures such as driving,telephone calls
8、,computer fees and magazine subscriptions.Similarly,sellers face search costs in identifying qualified buyers for their products,such as market research,advertising,and sales calls.Several Internet-based technologies lower buyer search costs.Many sites help buyers identify appropriate seller offerin
9、g:for example,search engines like Alta Vista,Yahoo! Or G;business directories like the one provided by Yahoo!;or specialized product and price comparison agents for specific markets,such as Pricewatch and Computer ESP for computers and components,Expedia and Travelocity for airline tickets and other
10、 travel products, and Yahoo! Shopping for electronics,and Dealtime for books and music.On-line agents like the one provided by R-U-S monitor consumer behavior and help buyers identify the most desirable prices and product offerings without requiring them to take specific action.Internet technology c
11、an also lower the cost to buyers of acquiring information about the reputations of market participants. Such reputations may be provided as part of the marketplace（for example,on Ebay）,or through specialized intermediaries,such as Bizrate,which rates retailers on specific attributes（service, product
12、 quality,delivery promptness etc）by surveying consumers that recently purchased products from these retailers. The Internet lowers seller search costs as well,by allowing sellers to communicate product information cost effectively to potential buyers,and by offering sellers new ways to reach buyers
13、through targeted advertising and one-on-one marketing.By reducing search costs on both sides of the market,it appears likely that buyers will be able to consider more product offerings and will identify and purchase products that better match their needs,with a resulting increase in economic efficie
14、ncy.But the reduction in search costs combined with new capabilities of information technology can set off more complex market dynamics,too.Competition in Digital MarketsIt may seem clear that lower search and information costs should push markets toward a greater degree of price competition, and th
15、is outcome is certainly plausible, especially for homogeneous goods. On the other hand, on-line retailers can use Interent technology to provide differentiated and customized products, and thus avoid competing purely on price. I will explore these possibilities in turn.The Benefits to Buyers of Grea
16、ter Price CompetitionLower search costs in digital markets will make it easier for buyers to find low-cost sellers, and thus will promote price competition among sellers. This effect will be most pronounced in commodity markets, where lowering buyers search costs may result in intensive price compet
17、ition wiping out any extraordinary seller profits. It may also be significant in markets where products are differentiated, reducing the monopoly power enjoyed by sellers, and leading to lower seller profits while increasing efficiency and total welfare （Bakos, 1997）.Some online markets may have low
18、er barriers to entry or smaller efficient scale, thus leading to a larger number of sellers at equilibrium, and correspondingly lower prices and profits. In particular, certain small-scale sellers may have a brighter future in a wired world if they can identify appropriate niches, because they can m
19、ore easily be searched for discovered, as search costs online are less determined by geography.It may thus be expected that online markets will have more intense price competition, resulting in lower profits as well as the passing to consumers of savings from lower cost structures. For instance, onl
20、ine shoppers may expect a 20-30 percent discount for items normally priced $30-500 （Tedeschi 1999）.The Attempts of Sellers to Practice Product DifferentiationThe dynamics of “friction-free” markets are not attractive for sellers. However, few goods are truly homogeneous. As a result, online retailer
21、s can use technology to increase product differentiation. This will lead to an increase in seller profits, which may partially or completely offset the decrease caused by lower search costs （Bakos, 1997）.As a starting point, online retailers can increase the number of product offerings and the infor
22、mation provided about each product, because they are not constrained by physical shelf space. This will be particularly true as merchants improve online store layouts, and as consumers acquire high speed Internet connections. The resulting increase in variety offers the possibility of customization
23、- that is, the ability to let each customer choose the desired set of product characteristics. Customization of conventional goods becomes especially possible when retail e-commerce is combined with modern production techniques that allow building-to-order. Dell computer is frequently mentioned as a
24、n example of how online ordering can allow consumers to customize their purchases, resulting in a much larger variety of product offerings than was available in the past. Consumers ordering a Dell computer online can customize several product characteristics, such as the processor, memory, capacity
25、of hard disk, display cards, monitor, and so on, resulting in thousands of potential product variations. This product variety is made feasible because the purchased computer is manufactured after the order is placed, thus eliminating the need for Dell to carry inventories of all possible variations
26、of its product offerings. Information-rich products lend themselves to cost-effective customization. For instance, delivering an electronic newspaper tailored to the interests of an individual reader need not be more costly than delivering the same copy to all subscribers, while offering access to a
27、 much broader selection of news and resources than would be feasible to print and distribute physically. Customization can be based on a set of preferences specified directly by the consumer, or more subtly, the features of the customized product might be deduced automatically. Technology allows the
28、 identification and tracking of individual consumers, both within an online store and across different websites. Profiling technologies allow the creation and sharing of consumer profiles, the matching of consumer identities with relevant demographic information, or comparison with the known prefere
29、nces of similar consumers. Such techniques can be used to discover or estimate the preferences of specific consumers.All these technologies make it possible for online merchants to assess their customers preferences with significantly more accuracy than physical stores or catalog merchants.For examp
30、le,product offerings can be customized and recommendations can be made based on a consumers attitudes,past behavior and demographic characteristics,or through”collaborative filtering”systems that offer recommendations based on the feedback and experiences of consumers with a profile of likes and dis
31、likes similar to the targeted consumer.Merchants can also attempt to differentiate themselves and switching costs for consumers through superior user interfaces with which consumers become familiar,or by employing systems that use past purchases or customer profiles to identify desired product chara
32、cteristics. For example,systems like As book recommendation engine allow buyers to identify products that have their desired features,without focusing on the corresponding price. To the extent that new purchaes provide information thst will increase the accuracy of future recommendations,consumers may prefer to concentrate their purchases to one or few online retailers,effectively facing switching costs similar to those induced by loyalty programs such as frequent flyer miles.In line wi
