South-Western College Publishing - Economics  
Anonymous Consumers Increasingly Faceless Too
Subject Assumptions and comparative statics
Topic Monopolistic Competition
Key Words Retailing, markets, sales, web sites, Internet, vendors, cost, products, staff, buildings
News Story

Online retailing is growing fast in markets such as airline tickets, toys, food and computers. Sales grew by 127% in the year ending in the first quarter of 1999. Two thousand secure web sites capable of electronic transactions are added to the Internet each month. However, online sales are still small, compared to overall retail sales of $2.7 trillion in 1998.

The benefits of online retailing include wider markets and longer hours. Vendors can often take a few days to customize products to suit consumer needs or refill out-of-stock lines. The cost of an electronic operation is lower because fewer staff and no buildings are needed. Online shopping is also more convenient.

One observer noted that it is fast companies beating slow ones, not necessarily large companies beating small ones. One example is a Brooklyn clothing store, Stacia New York, which can now sell all around the country.

(Updated January 1, 2000)

Questions
1. a) With online selling rather than conventional store-based selling, which cost curves are affected and how? Why?
  b) According to the news story, what happens to demand when online selling replaces store-based selling? Why?
2. a) Draw a diagram of the monopolistically-competitive equilibrium of Stacia New York. Include the demand, marginal revenue, average total cost, and marginal cost curves. Mark the equilibrium price, output and profit.
  b) Show how online selling affected the curves and the equilibrium of the company. Explain what happened.
  c) In what sense are fast companies beating slow ones?
3. Monopolistic competition is characterized by product differentiation.
  a) Does the internet enhance or reduce product differentiation? Refer to the news story.
  b) What are the implications for the elasticity of the demand curve?
Source Sara Nathan, "Online retail sales soar, jobs rocket," USA Today, October 27, 1999.

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