Economics and Electronic Commerce

Abstract

For economists who study markets—whether wholesale or retail, goods or services, commodities or highly differentiated products—these are extraordinary times. The Internet and related technologies have caused the costs of many kinds of market interactions to plummet. As with any dramatic technological change, the most obvious and earliest effects are incremental: we find easier and less costly ways of doing the things we are already doing. Over time, however, the shifts are more drastic: we discover that we can do entirely new things, or completely restructure the way in which certain business activities are carried out. Such long-term impacts of technological change are always hard to forecast, but that task is especially difficult in the case of e-commerce, where markets are currently very far from equilibrium. In the “land rush” to secure Internet real estate, to gain first-mover market position and other advantages, many firms are pursuing strategies that are properly interpreted as the payment of one-time, largely sunk entry costs. In some cases the focus of these expenditures is on “customer acquisition,” through pricing that is not likely to be sustainable, while in others it is building infrastructure to achieve minimum efficient scale. These expenditures—fueled by inflows of venture capital—may represent reasonable investments for a chance of a future stream of profits that might accrue to the