Question

The Internet’s effects on (lower) transaction costs and increased competition have been widely recognized. Innovative service providers such as amazon, eBay or search engines such as Google and Bing have lowered search costs in many markets. And while Internet services have made entry into many markets easier, concerns have recently emerged about competition in these Internet service markets themselves.(Justus Haucap & Ulrich Heimeshoff,2014)

What are the economic characteristics of online markets? What implications if any do these characteristics have for the level of market power held by firms providing online search, auction platforms or social networks? Do competition policy rules need to be rewritten or extended for these markets?

Answer 1

Some of the economic characteristics of online market are:

• Cost reduction: The online market is known for the ability to reduce the cost of their operation. The technologies used by the online market leads to the reduction in the cost of transaction, cost of communication, cost of processing and many more.
• Innovation: The technology of the online markets also leads to various types of innovations that attract the consumers.
• Competition: The level of competition in the market also increases because of online market. The new innovation is also one of the factors that increase the competition in the market.

All these factors have a great impact on the market power hold by online firms. The firms providing online search, auction platform, and social networks hold a very large share of market power as they have the required characteristics to attract many consumers. The modern world is highly attracted towards these firms as the consumer thing that these platforms are easy to conduct their transactions or exchange. These platforms also save time of the consumers and provide various other attractive options and innovations to them.

Online markets have huge impact on the competition on the competition policy rules. The online market brings various concerns to these competition policy rules. Some of the concerns are:

• The online markets make the comparison of the prices of a product difficult. The firms adopt this strategy so that the consumers do not switch from their product.
• The online market also creates information asymmetry as the consumers do not have all the information about the product they purchase. The quality of the product remains unknown as the consumers cannot test the product before purchasing it.
• The online sometimes also shows anti-competitive behavior.

Because of these concerns there arise the requirement to rewrite or extend the competition policy rules.