Can Perfect Competition Achieved by Electronic Commerce?

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Can perfect competition achieved by Electronic Commerce?


Information and knowledge have emerged as most important sources of wealth in the recent years (Kehal & Singh 2005, p.vii). There is a computer-based technology storm and it has impact and influence on the global market, education and government. More and more people are using the personal computers and Internet, and it has becoming as a fundamental tool to our daily lives. We all directly or indirectly involved in the variety of processes of the new, on-line, knowledge-based economy. Kehal and Singh (2005, p.3) also state that the essential elements of digital economy is digitalization and intensive use of information and communication technologies (ICT); codification of knowledge; transformation of information into commodities and new ways of organizing work and production (Kehal and Singh, 2005, pp3). This implies that more and more products and services are available online. Is the increasing number of commodities available and information accessible online take us to a theoretic market in a perfect competition environment?

Some commentators argue that the Information technology will lead to the Perfect Competition in the new digital age. For example, Petre and Harrington(1996), the authors of “the Clever Country”, said that the online markets are making perfect competition appear feasible because it enables consumers to get comprehensive free information about the products being offered by large numbers of merchants across the world, and to purchase from there merchants with very low transaction cost.

In addition, a recent survey of Internet economics in the Economist (2000) states that the Internet cuts costs, increases competition and improves the functioning of the price mechanism. It thus moves the economy closer to the textbook model of perfect competition.

Adam Smith, who is widely regarded as the father of modern laissez-faire economics theory, helped define the original concept of free market competition. What we called it now ‘perfect competition’. It represents a market in which no participant can influence prices. It characterized by a free flow of information, no barriers to entry, and a large number of buyers and sellers (, 1999). It is unlikely that the E-commerce can really create a perfect competition environment, for instance, how could you possibly have a market where there was free information about all the prices charged by all suppliers and what markets have an infinite number of suppliers, so that no single seller can affect the market price. However, at least, we believe that the E-commerce will actually bring the economy closer to perfect competition. This essay takes a critical view of these arguments, and will briefly discuss the effect of the E-Commerce on price discrimination and the barriers for firms to entry into the online market.

Part A: E-Commerce will lead to perfect competition.

1. The end of the price discrimination

For many products, from digital cameras to software services, the consumers are facing a complicated choice of different products and services with different prices. Sometimes, suppliers are charging different buyers of different prices for exactly the same product. Much of the supplier’s pricing purpose is to approximate potential purchasers reservation prices and set the price of the product low enough to attract a large number of purchases, but no lower than necessary (Edwards, 1942). One way for a seller to extract the highest possible reservation prices from a diverse group of potential purchasers is to segregate them into multiple categories and then charge a different price to purchasers in each category (Bichler, 2000; Foresyth, 2000). Therefore, the ultimate point in price discrimination is charging a different price to every single customer. The price discrimination may hurt competition by giving favored customers an edge in the market that has...
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