Economics: Principles and Applications, 2e by Robert E. Hall & Marc Lieberman

Online Retailing: The Basics • An online retailer is a firm that provides goods and services directly to consumers who order on line. • Online retailers produce and sell retail services. • © 2001 South-Western, a division of Thomson Learning

The Big Picture: Online Retailing & Living Standards Online retailing enables the same retail service to be provided using fewer resources. The resource savings occur on both the selling side (where less labor, land, and capital are needed to make goods available on line) and on the buying side (where consumers save time by shopping on line). © 2001 South-Western, a division of Thomson Learning

The Big Picture: Online Retailing & Living Standards Online retailing will shift the economy’s production possibilities frontier outward and enable us to enjoy a higher standard of living. That is, we can have more and better retailing services, or more of other things we value, or both. © 2001 South-Western, a division of Thomson Learning

How the Four-Step Process Helps Us Analyze the Online Retail Industry Key Step #1: Characterize the Market Online retailers are involved in a number of different markets, and the ones we choose for our analysis--and how we characterize them--will depend on the specific question we want to answer. © 2001 South-Western, a division of Thomson Learning

How the Four-Step Process Helps Us Analyze the Online Retail Industry Key Step #2: Identify Goals and Constraints The firm’s goal--as it makes decisions in its product market, in its factor markets, and in financial markets--is to maximize the total present value of its future profits. © 2001 South-Western, a division of Thomson Learning

How the Four-Step Process Helps Us Analyze the Online Retail Industry Key Step #3: Find the Equilibrium To answer important questions, we must find the long-run equilibrium in online retail markets. There is considerable disagreement among observers over the nature of that equilibrium. © 2001 South-Western, a division of Thomson Learning

How the Four-Step Process Helps Us Analyze the Online Retail Industry Key Step #4: What Happens When Things Change The Internet itself is an important change--one that is causing a fundamental reconfiguration of the economy. © 2001 South-Western, a division of Thomson Learning

Resource Allocation: From Bricks and Mortar to the Internet • Changes in the Online Retail Market • A Detour: Entry and Economic Profit • Some Conclusions About the Market for Online Retail Services • The Impact on Traditional Retailers • © 2001 South-Western, a division of Thomson Learning

Resource Allocation: From Bricks and Mortar to the Internet The forces driving entry and exit in the long run are not current profit, but rather the total present value of future profit that firms anticipate. When a potential entrant anticipates positive total present value of future profit, it will enter the industry, even if it anticipates short-run losses. © 2001 South-Western, a division of Thomson Learning

Resource Allocation: From Bricks and Mortar to the Internet Firms expect future profits from selling goods online, and they expect the total present value of future profits to be positive, in spite of early losses. These expected future profits serve as a market signal, encouraging firms to enter online retail markets and provide more online retail services to society. © 2001 South-Western, a division of Thomson Learning

Resource Allocation: From Bricks and Mortar to the Internet The demand for traditional retail services will decrease. All else equal, this will lead to lower markups and short-run losses at traditional retailers, causing some of them to exit the industry. In long-run equilibrium, there will be fewer traditional retailers than initially. © 2001 South-Western, a division of Thomson Learning

Resource Allocation: From Bricks and Mortar to the Internet Because of online retailing, there will be fewer traditional retailers than there would otherwise be, and each will charge a lower markup than it otherwise would. © 2001 South-Western, a division of Thomson Learning

Online Retailing and Labor Markets • The Impact on Internet Professionals • The Impact on Traditional Retail Workers • Effects in Other Labor Markets • © 2001 South-Western, a division of Thomson Learning

Online Retailing and Labor Markets The demand for highly skilled workers needed by Internet firms is increasing, causing salaries for these workers to soar. The rise in salaries acts as a market signal--telling individuals that society would be better off if they took jobs in Internet firms. © 2001 South-Western, a division of Thomson Learning

Online Retailing and Labor Markets Entry of new workers would ordinarily bring salaries back down somewhat. But continued entry by dot.com firms will work against the drop in salaries. In the new long-run equilibrium, there will be more highly skilled professionals working at Internet firms, earning higher salaries than initially, but not necessarily as high as in the short run. © 2001 South-Western, a division of Thomson Learning

Online Retailing and Labor Markets Because of online retailing, the demand for traditional retail workers is decreasing, or rising more slowly than it otherwise would. As a result, salaries for these workers are stagnating. This acts as a market signal--telling individuals that society would be better off if they took jobs elsewhere. © 2001 South-Western, a division of Thomson Learning

Online Retailing and Labor Markets Exit of traditional retail workers would ordinarily bring salaries back up somewhat. But continued exit by bricks and mortar retailers may work against this effect. In the new long-run equilibrium, there will be fewer people working at traditional retail outlets, earning lower salaries than initially, but not necessarily as low as in the short run. © 2001 South-Western, a division of Thomson Learning

Online Retailing and Labor Markets Because Internet firms then to hire more highly skilled workers, the wages of these workers will increase, whether they work for Internet firms or not. Because traditional retailers tend to hire mostly less-skilled workers, their wages will decrease or rise more slowly, whether they work in traditional retail stores or not. © 2001 South-Western, a division of Thomson Learning

Online Retailing and the Stock Market In the long-run profits view,online retail markets can be hugely profitable due to barriers to entry. Only a few firms will survive in each retail market, and each survivor will have a monopoly on some valuable aspect of retail service, or be able to cooperate with its few competitors to boost markups and profits. © 2001 South-Western, a division of Thomson Learning

Online Retailing and the Stock Market • Barriers to Entry in the Online Retail Industry • Economies of Scale • Reputation • Protection of Intellectual Property • Network Effects • Lock-In • © 2001 South-Western, a division of Thomson Learning

Online Retailing and the Stock Market In the zero-profits view, online retail markets will be unable to earn economic profit in the long run. Barriers to entry will not be high enough to keep out new entrants, and comparison shopping will be easy. As a result, online retail markets will most closely resemble monopolistic or perfect competition, with zero economic profit in the long run. © 2001 South-Western, a division of Thomson Learning

Online Retailing and the Stock Market • Counterarguments to Barriers to Entry • Economies of Scale: No one yet knows at what point the minimum efficient scale occurs. • © 2001 South-Western, a division of Thomson Learning

Online Retailing and the Stock Market • Counterarguments to Barriers to Entry • Reputation: Newcomers can develop good reputations, too. Moreover, there are many conventional firms that already have good reputations. • © 2001 South-Western, a division of Thomson Learning

Online Retailing and the Stock Market • Counterarguments to Barriers to Entry • Protection of Intellectual Property: Legal systems will evolve to help keep e-commerce markets open and highly competitive. • © 2001 South-Western, a division of Thomson Learning

Economics: Principles and Applications, 2e by Robert E. Hall & Marc Lieberman