In his article about strategy and the internet Michael Porter (Strategy and the Internet, 2001) points out that because of the internet technology companies tend to shift the basis of competition away from quality, features, and service and toward price. I think he makes a very good point, but let’s take a different view on this.
Therefore, let’s take a look on Adam Smith’s perfect market. In order to have perfect competition some conditions must be fulfilled. The most important conditions are:
- Lots of buyers
- Lots of sellers
- Homogeneous products
- No entry barriers
- Perfect knowledge and information
The effect of these conditions are that firms have no possibility to stand out and ask a different price than their neighbour. If you sell the same t-shirt as your neighbour and he sells it for less money, nobody will buy your shirts. Due to the perfect information everybody knows that your neighbour sells it for less. So far economics 101.
Over the past few decades businesses were able to sell products for a price which they could set themselves. The local clothing shop might have been selling the same products as the clothing shop a few miles further for a higher price. But it never minded, nobody knew this difference.
Internet has changed the situation completely. Because of the internet the barriers disappeared. Your local retailer can sell his clothes online, just as the retailer from a few miles further. The potential group of buyers immediately increases from the local town to everybody with access to the internet. Besides, lots of retailers which were unattainable become attainable and sell the same products as you were used to buy from the local shop. We can see that the internet shifted the market more to the perfect competition. Because of the internet there are more buyers and sellers on the market, the entry barriers are lower (see also the Porter article) and we know exactly what we can buy where and for what price.
Coming back on where I started. Porter sees that there is a fierce price competition going on because of the internet and that we shifted away from competition based on the differentiation of products and service. But the internet does not change anything about the homogeneous condition of perfect competition. The only way to stand out is to deliver a differentiated product or service. Otherwise the price will indeed be the basis of competition.
Isn’t the internet exactly the reason to shift the basis of competition towards quality, features and service?
