Question

QUESTION 1

The relentless drive towards big business in recent decades has seen markets become more concentrated and increasingly dominated by large producers. However, forces are at work that are undermining this dominance, and bringing more competition to markets. One of these forces is e-commerce.

1. Give THREE (3) examples of products that are particularly suitable for selling over the Internet and THREE (3) that are not. Explain your answer.
2. Provide TWO (2) justification why the Internet may work better for replacement buys than for new purchases.       
3. Explain how eBay can both increase competition across the economy and simultaneously acquire very substantial monopoly power.

Answer 1

A. The products which can be suitable for purchasing online are: packaged food, small electronics like mobile phone, charger etc, books

Products not suitable are: clothes, furniture, fresh fruits or vegetables

(the reasons are straightforward. All items in the no suitable category are those which are purchased better with prior inspection. For instance in clothes, size and comfort can be a major issue if not tried before hand. Furniture can look odd if the color is even slightly different from the expected product and if the comfort is not as expected. Fruits and vegetables may not turn out to be fresh.

B. Replacement buys are better on the internet because 1) it eliminated the need for inspection of things like comfort for eg. if you like a shirt but just have the wrong size, it can be easily replaced on the internet 2) there is no uncertainty for a replaced product as compared to a new product

C. eBay can increase competition as it allows a lot of sellers and buyers to enter the market at minimal cost which was earlier not possible, especially for small sellers. It also eliminates incomplete information as you can know who is selling the product you want at what price. This does not happen in traditional shopping where you can't go to every stroe to know the price. So, it reduces monopolistic pricing. At the same time, eBay can make use of its exclusive technology to gain monopoly powers. It can force customers to make transactions through a payment gateway which it owns and gradually increase transaction cost on the same, earning monopoly rents oncw the market is hooked to eBay