The Great Experiment

The rise of business-to-consumer electronic commerce represents one of the greatest economics experiments in history. In its initial conception, anyone could start a business-to-consumer firm. By shipping goods directly from wholesalers, firms would run extremely efficient operations. They would spend only on the website and earn money from sales, possibly from advertising, and from interest earned because goods were sold before suppliers had to be paid. Customers would use comparison-shopping engines to choose the lowest cost suppliers for relatively standardized goods. Thus prices for these goods would fall to cost and price dispersion would fall to zero, because no firm could charge a price above market.

The reality as of 2001 is that business-to-consumer electronic commerce firms look a lot like physical retailers and many operate in both channels. Most customers do not use comparison-shopping engines, although usage is slowly increasing. Those who comparison-shop often do not choose the lowest price vendor. Thus, price has not fallen – and almost certainly never will fall – to cost. Further, price dispersion is significant, online as well as offline. The fact that the evolution of business-to-consumer electronic commerce did not conform to the initial rather far-fetched plan should not obscure the fact that the rise of business-to-consumer electronic commerce still represents one of the greatest economics experiments in history.