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Emergence of Electronic Markets: Implication of Declining Transport Costs on Firm Profits and Consumer Surplus

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Abstract

Electronic coordination may drastically reduce transport costs, especially for digital or digitalizable products where local markets may actually shrink to a point in space. In the present paper we use a model with differentiated products to analyze the impact of declining transport costs on profits and consumer surplus. While consumers always gain, the effect on producers depends on the degree of product differentiation and the magnitude of transport costs in the electronic market mode. Profits do only rise if products are substantially differentiated – in this case the positive effect of an extended consumer base due to the preference for product differentiation dominates the negative effect of intensified competition. This result is amplified if transport costs in the electronic market mode are substantial. In this case profits only increase if products are almost independent.

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  • Karl Morasch & Peter Welzel, 2000. "Emergence of Electronic Markets: Implication of Declining Transport Costs on Firm Profits and Consumer Surplus," Discussion Paper Series 196, Universitaet Augsburg, Institute for Economics.
    • Handle: RePEc:aug:augsbe:0196
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    1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 43(2), pages 217-235.
    2. Bouckaert, Jan, 2000. "Monopolistic competition with a mail order business," Economics Letters, Elsevier, vol. 66(3), pages 303-310, March.
    3. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    4. Vives, Xavier, 1985. "On the efficiency of Bertrand and Cournot equilibria with product differentation," Journal of Economic Theory, Elsevier, vol. 36(1), pages 166-175, June.
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    Cited by:

    1. Martin Bandulet, 2002. "Strategic Impacts of Technology Switch-Over: Who Benefits from Electronic Commerce?," Discussion Paper Series 221, Universitaet Augsburg, Institute for Economics.
    2. Karl Morasch & Martin Bandulet, 2001. "Incentives to Invest in Electronic Coordination: Under- or Overinvestment in Equilibrium?," Discussion Paper Series 200, Universitaet Augsburg, Institute for Economics.
    3. Karl Morasch & Martin Bandulet, 2011. "Sharing the Market or Getting Closer for a Fight? Strategic Reaction to Reduced Trade Costs," Open Economies Review, Springer, vol. 22(4), pages 709-737, September.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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