Digital Markets

In the decade since the commercialization of the Internet many observers have pondered what impact it will have on the fundamental dynamics of markets.

As millions of consumers flock online to purchase just about anything and everything — new and used, large and small, cheap and expensive, from near and afar — how will the interaction between buyers and sellers change?

Buyers with access to the Internet have certain opportunities that may affect what they purchase, when, and where they take their business.

Using sites like Google or Yahoo!, a buyer has the ability to search for a product or service; to compare sellers on important attributes such as price, quality, delivery and service; to read product reviews and consider the opinions of other buyers; and to do all of this quickly, cheaply, and with relatively little effort.

This can be done regardless of whether or not the buyer chooses to complete the purchase online. Never before have buyers been able to know so much, so easily, about what they purchase and from whom.

Sellers can reach large numbers of consumers anytime day or night and can extend their business beyond the limits of geographic proximity more easily. Unconstrained by shelf space, sellers can list a large catalog of items and can quickly adjust prices to reflect changes in demand.

A seller, likeĀ Dell Computer, can eliminate intermediaries and engage buyers directly online to understand their consumption habits and track their preferences, and then use this information to configure customized products and provide personalized levels of service.

Just like the buyer who can easily search for the seller offering a product at the lowest price, sellers can search for the one buyer who is willing to pay the most. This is exactly what happens at the close of every auction on eBay (the highest bidder wins).

Furthermore, the immediacy of the data that flow from digital marketplaces allows sellers to integrate the supply chain and better manage production, inventory and distribution. Not only do sellers know more about buyers, they also know more about their business partners and about their competitors.

What does all this mean? Does the Internet make markets more or less competitive? Should we expect to see the prices of goods and services rise or fall due to the migration of consumers online? Will the dispersion of prices (that is, the spread between the lowest and highest price for a particular product) narrow or widen?

Will the importance of brand names increase or decrease? Will price drive competition? Will digital markets become dominated by a handful of mega-sites, likeĀ, or will there be opportunities for smaller businesses to be competitive?

Over time, will the Internet tilt the balance or power between buyer and seller, and in what direction?