Much has been written on the effects of the Internet on the relative bargaining power of consumers vis-à-vis that of corporations. The initial expectation was that the Internet would empower individual consumers by expanding the range of consumption choices and by reducing information or product search costs.
There were also predictions that the growth of new e-commerce retailers will result in re-intermediation where independent websites provide automated price comparison services for consumers; and dis-intermediation where the middleman is made redundant, resulting in the reduction of aggregate mark-ups suffered by consumers due to traditional multi-tier product distribution. Proponents claim that the enhanced ability for consumers to compare prices online will reduce the likelihood that firms can charge supra-competitive prices, alleviating the situation of asymmetric information that existed before the advent of e-commerce.
An example where consumers have benefited is Priceline.com where air travellers are able to compare airline fares and obtain last-minute discount fares at search costs far below traditional means, resulting in more severe competition in the air travel industry. While there are many examples where consumers have benefited greatly from the effects of re-intermediation and dis-intermediation, the evidence overall is mixed and the consensus has shifted towards a less lofty view of what e-commerce can in fact contribute to increasing consumer clout.
Recent research increasingly substantiates the view that reputation effects are more important online than offline. In other words, unless the product is highly undifferentiated or the quality of the product standardised, firms that have a well-established reputation offline have a much higher chance of succeeding online than firms that have no reputation, especially for high value goods. This explains why many Internet start-ups have either gone under or have sold their operations to more established corporations once faced with competition arising from firms that have a substantial offline presence.
This implies that the Internet may not enhance competition significantly in markets such as the car industry where firms are able to leverage their existing offline reputation online. Moreover, the impact of the Internet on the purchasing process of consumers is often not to replace existing distribution channels but to supplement them. This is the case for most new car buyers who use the Internet to compare prices, read reviews and comments from other consumers, but who ultimately go to a local dealer to test-drive and to make the purchase, rather than order directly online.
There is also evidence to suggest that the posting of prices online by firms of an oligopoly (industry with a small number of firms capturing the entire market) may facilitate implicit collusion by providing a means of exchanging pricing information in order to effectively coordinate cartel behaviour. This is analogous to the use of price releases in traditional media for the same purpose. Online posting of prices could be used by these dominant firms for price fixing and resale price maintenance (i.e. enabling dealers to coordinate the prices that they set) in the new car retail market. In fact, a complaint was filed with the Competition Bureau of Canada against Toyota alleging use of the car configurator/pricing system that they provided on their website for resale price maintenance.
