User:Maria.barrett/sandbox

Impact of the Internet on Business Landscapes

The increased use of the internet has had significant impact upon the competitive structures of the United States economy by differentially impacting small and large businesses. Studies indicate that the primary benefits of access to the internet for small businesses are the direct and indirect network effects, lower search costs and price dispersions. The primary drawbacks are limited interaction with consumers and increased expenditures.

There are multiple reasons to encourage more competition through small businesses. In particular, small businesses allow for more consumer benefits which can result in more egalitarian distributions of income, creation of more jobs and an expanded middle class.

According to the research by McKinsey Global Institute, the internet has become the driving force behind GDP growth in developed economies over the past 5 years, accounting for a 21 percent increase in GDP. The internet is considered a two sided market with indirect and direct network effects. Direct network effects are described as the utility of a service increasing as the amount of users increases. Indirect network demand for two or more users. They are defined when the value of one client group increases as another user based group joins the application.

Smaller businesses thrive with indirect network effects because they encourage more buyers and sellers. The increased numbers of participant on one side of an online business leads to an increase on the other market side. Direct network effects, on the other hand, are related to the size of the user base and thus favor large companies. For example, authors Haucap and Heimeshoff studies on internet-based dominant services demonstrate that in the case of telecommunication networks like Skype, Facebook and LinkedIn, the utility that consumers derive depend on the presence of other users.

One industry that the access to the internet has affected is the newspaper industry. The news industry is in competition with the online news media more broadly. According to the authors, Jeon and Nasr discussion, 57 percent of newspaper readers now turn to digital sources for their news information. Although this study states that the presence of the internet has negatively impacted the newspaper industry, it also demonstrates how small businesses have undermined large news monopolies. Because large businesses gather their news information from smaller news companies, it allows readers of these articles to navigate to these small companies websites. This creates more consumer interaction and ambition for high quality news for smaller businesses.

Search costs are defined as the costs of looking for information. It is easier to discover and compare information through the internet. Lower search costs allow consumers to gather a range of prices for the specific product. This reduces price dispersion. The internet supports consumer spending by providing different retailers who produce a variety of products and a variety of price dispersion. These show that lower search costs support a more competitive structure because it is easier to find unique and rare products through the increase of firms presence on the internet.

The drawbacks for small businesses include limited interaction between business and consumer and very high expenditures. The New York Times writes an article about a grocery retailer, "Holiday Market", that is labeled as a small business in Detroit. The stores revenue has increased by 20 percent because of the addition of online shopping for customers. However, although profit was booming there were still some logistical challenges for this small grocery retailer to have a presence online. One challenge was the expenses. The owner describes how expensive it was to create space inside his store to keep his online orders cold and fresh. He even had to hire more employees to shop in-store for the online orders because of the increasing demand from customers online.