Economics focus - The click and the dead
E-commerce favours large companies but only because that is what people want
Jul 1st 2010


FOR as long as anyone can recall, chess enthusiasts in Cambridge, Massachusetts, have played on large streetside chessboards in the shadows of the stately buildings of Harvard Yard. But even in a place that seems impervious to the passage of time, there is change. One example is an empty space where a much-loved local institution, an independent bookshop called WordsWorth, stood for 30 years. Like small-business owners in other industries, its proprietors held the internet, of which the student-heavy populace of Cambridge were early adopters, responsible for having to shut up shop in 2004.

Everywhere people bemoan the replacement of the local and the quaint by outposts of big, homogeneous chains. But how true is the notion that the internet in particular has hastened the demise of some retailers, and that those it hurt were overwhelmingly small? A new study* on this subject by four economists at the University of Chicago looks at three industries—bookshops, travel agencies and new-car dealerships—for answers. They find much truth in the conventional wisdom, but also some solace for those who believe small is beautiful


Niche work if you can get it
Big firms are not predestined to hoover up all the benefits from e-commerce. The theory suggests that as people become better informed thanks to the web, the businesses that cater most to their desires will thrive. If people want lower prices, then bigger shops and chains, with their economies of scale, may be the ones that do best. But it is equally possible that a small shop meeting a very specific need might see its market share expand because more people who want what it provides (cult records or fan fiction, for instance) learn of its existence.
The study finds evidence for this, too. Among booksellers, all the smaller categories withered in the internet age—save one. The lone exception was the very smallest, shops with between one and four employees. These appeared to have weathered the storm unscathed: in Harvard Square itself, Curious George, a children’s bookshop run by the same people who owned WordsWorth, flourishes to this day. The internet allows customers to see businesses’ true colours. The adjustment that follows may be wrenching. But the net effect is one that conforms to what consumers want, whether they admit it to themselves or not.

“E-commerce and the Market Structure of Retail Industries”, by Maris Goldmanis, Ali Hortaçsu, Chad Syverson and Önsel Emre. Economic Journal, June 2010

Footnote:
These are but the first two paras and the closing two paras of this interesting piece. To read the full article visit The Economist online.The Bookman read this story in  The Economist July 3-9 , 2010 edition bought at Barnes & Noble, Union Square, NY..