I read an interesting article in the Belfast Telegraph today (“Get a life, or just Google it”) about Google’s plan to store all data it gains from users permanently to offer more relevant websites and product advertisments. Ignoring the obvious privacy concerns, there may be another issue with this- expanding Google’s price comparison services (eg Froogle) may be pushing the prices that consumers pay up, not down.
“For example if you want to buy a particular book from a certain site, Google could locate other sites selling the same book at a cheaper price or it could recommend other books by the same author.” The Telegraph
The reason is that competitors know exactly what price they have to beat, all it takes is a quick search. Without this, they only have a vague idea and will often offer very low prices in case a competitor can beat them. Paul Klemperer, the UK governments auction theorist, states this more formally:
Transparent internet prices are readily observable by a firm’s competitors so lead, in effect, to an “ascending” auction; a firm knows if and when its others are being beaten and can rapidly respond to its competitors’ others if it wishes. So, viewing each car sale as a separate auction, the price any consumer faces falls until all but one firm quits bidding to sell to him. …
On the other hand, shopping to buy a car from one of competing dealers is very like procuring in a (first-price) “sealed-bid” auction. It is typically impossible to credibly communicate one dealer’s other to another. (Car dealers often deliberately make this hard by refusing to put an other in writing.) So from the buyer’s perspective it is as if sellers were independently making sealed-bid others in ignorance of the competition. …
“Why Every Economist Should Learn Some Auction Theory”, Paul Klemperer
Other concerns are that the only companies that can offer very low prices across the board are large firms, as they buy in such bulk and have low cost per transaction due to their size. Again, Google’s price comparison service can be a disadvantage to small firms.
To end on a more positive note, I am just highlighting some issues I forsee that may come to be important in the future. At present it is clear that the Internet as a who has enabled small companies to reduce their selling costs, sell to a wider audience and also allow consumers to easily compare and, in general, buy products at prices far lower than the high street.