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Online Shopping Essay

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As internet search developed, online shopping has gained its popularity significantly. Thanks to the internet, consumers are now able to get accurate information on products and services easily, without even having to leave home. Internet has played an important role in both searching and purchasing goods. In this essay I would like to discuss the impact of internet to markets in theory, and what happens in the real world.

In theory, when consumers decided to purchase products, sometimes they would compare the prices between different firms, then make decisions, since they do not have full information about prices and qualities. They would spend time and energy on searching. Some customers would make phone calls or travel to different stores to compare; some would see experts for advice. Such monetary costs are external costs, while internal costs refer to mental efforts to search. The existence of search cost makes firms to charge different prices, where customers of one firm are not aware of other firms (or they do not seek information). This is known as price dispersion which is associated with incomplete information. Consumers who do not buy from the cheapest seller are not aware of other cheaper options.

Suppose there are two types of customers in a market – one group is well informed and will always buy from firm with the cheapest price, the other group uninformed and will acquire information at some costs per additional search. Then some of the uninformed customers will search sequentially and stop if the cost will exceed their expected gain. Firms then set prices based on such behavior. As more customers become informed, firms will set the perfectly competitive price. Conversely if most customers are uninformed, firms wi...

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...n conventional markets, therefore we might expect no or less price dispersion in these markets. Even if the market were not perfectly competitive, we would expect firms to adjust prices regularly. However, researchers found that price dispersion in online markets is substantial and no narrower than in offline markets, even for standardized markets like books, CDs and DVDs.

Although consumers usually do not have to spend money on searching, it is still time-consuming for most buyers. Some consumers are sophisticated users who use shopbots to find the cheapest shop quickly. In contrast, others who do not know how to search efficiently or do not have enough time may buy from the first site they find. Therefore for those consumers who are not familiar with internet shopping, there are still big search costs. Switching costs cannot be neglected either in such markets.
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