With the growth of the internet, there is a large number of online retailers as

Question

With the growth of the internet, there is a large number of online retailers as well as buyers in the online retail market.

a) Why, given the growth of the Internet, would you expect to find that different firms would charge very similar prices for the same good? (6 marks)

b) Despite the logic of part a of this question, several recent studies have found that different online retailers often charge quite different prices. How might you explain this result? (7 marks)

c) Monopolistically competitive firms earn zero economic profit in the long run as do perfectly competitive firms. Does this mean that total surplus is maximized in a monopolistically competitive market? (7 marks)

Explanation / Answer

A) THE ONLINE RETAILERS ARE SELLING ON PLATFORM THAT IS ACCESSIBLE TO LL CONSUMERS. OVER HERE THERE IS NO RESTRICTION ON INFORMATION FLOW AND THUS BUYERS AND SELLERS HAVE THE PERFECT KNOWLEDGE OF THE MARKET PRICES AND GOODS ON OFFER. THUS ALL THE RETAILERS TRY TO KEEP THE PRODUCTS PRICES WITHIN THE SAME RANGE. ALSO THERE ARE COMPARISON SITES WHICH SIMULTANEOUSLY SHOW THE PRICES OF PRODUCT CHARGED BY DIFFERENT RETAILERS. THE GROWTH OF OF INTERNET WILL MAKE THIS COMPARISON AND AWARENESS AMONG BUYERS TO GROW AND THUS WE CAN SEE SIMILAR PRICES FOR SIMILAR PRODUCTS.

B) THE PRICE DIFFERENCE AMONGST THE ONLINE RETAILERS IS FOUND DUE TO SEVERAL REASONS. THE MOST IMPORTANT BEING THAT SEVERAL RETAILERS OFTEN GOES AHEAD FOR SALES, OFFERING THE PRODUCTS AT LOWER PRICES TO CLEAR STOCK, THEY ALSO TRY TO CAPTURE THE CUSTOMERS ATTENTION THROUGH THIS METHOD TO INCREASE HITS ON THE SITE. ALSO THE STRATEGY IS USED TO RETAIN LOYAL CUSTOMERS AND TO REPEAT THE BUSINESS.

C) THE TOTAL ECONOMIC SURPLUS IS NOT MAXIMIZED IN NONPOLISTICALLY COMPETITIVE MARKET BECAUSE OVER HERE THE FIRM IS A PRICE SETTER AND IT CHARGES PRICES HIGHER THAN ITS MARGINAL COST THIS RESULTS IN A PRODUCER SURPLUS. THIS WILL RESULT IN THE DECLINE OF SURPLUS BOTH FOR THE PRODUCER AND THE CONSUMER.

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