Monday, November 17, 2008

Can Internet Increase Market Contestability?

Definition of contestable market: Market where there is freedom of entry & where cost of exit is low


(1) Lower marketing costs/ lower sunk costs. New firms, usually with financial obligations no longer have to worry over the need to spend excessively on advertisement to market themselves & to create powerful brand. With minimal expenditure, they can easily reach millions of consumers worldwide. Also, since the costs of exit are lower, more will willing to take risk. This increase contestability

(2) Lower start up costs. Internet means some businesses may choose to operate completely online. This significantly helps to reduce large overhead costs such as rental of shops, premises, utilities etc. Dell & Amazon are two good examples

Reduce contestability,

(1) Rise in other form of costs. No doubt marketing costs have been lowered significantly, but there are other costs that rise considerably. For instance continuous expenditure on web maintenance, network security measures, expensive servers & transportation costs when delivering the goods. To some extent it may outweigh marketing expenditure & thus reduce contestability

(2) Practice of limit pricing.
There are many aspects of contestability we have to look at. No doubt firms may now find it easier to get a foothold, but still large established firms can practice limit pricing. They can lower down the price of their goods to a level where new firms may find it unprofitable to join the industry

(3) Not all have access to internet. The intention to use internet as marketing medium to enlarge market share may not be always successful. No doubt costs of entry & exit are lower, but new comers need to consider about targeted market. In developed economy, consumers normally have their preferred brand. Meanwhile, market in emerging economies is slow as not all consumers are internet savvy. Some even have no access to internet

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