The Revenge of the Middleman: A Contradiction in Internet Commerce

Strategic Insights -

The rise of internet commerce was supposed to eliminate middlemen and enable businesses to sell directly to their customers. However, the examples of successful internet businesses, such as Yahoo! and Amazon.com, reveal a paradox. As the internet enables price comparison and price wars, it may not deliver the promised riches for middlemen. In fact, research by IBM suggests that the internet may lead to a never-ending cycle of commercial war, undermining the tendency of the system to efficiently organize itself.

Key Takeaways:

  • The concept of disintermediation, where businesses sell directly to customers, may not be a reality in internet commerce.
  • Middlemen, such as Amazon.com, can still make profits with finer margins than conventional retailers, but at the cost of a bloody, never-ending commercial war.
  • The IBM researchers' work suggests that the internet may lead to unstable limit-cycle price wars, undermining the system's tendency to self-organize and leading to chronic unprofitability.
  • The US airline industry's experience in the 1980s, where price wars led to industry-wide unprofitability, may be a warning sign for the future of internet commerce.
  • The IBM work is economic modeling, subject to pre-conditions and possible errors, but it offers an intriguing possibility that the internet may not deliver promised riches for middlemen.
  • The concept of price brokering, where companies gather product information and send it to consumers, may lead to a frenzy of cyber-competitive price comparison.
  • The example of www.bottomdollar.com, a price brokerage service, shows how consumers can quickly seek out the lowest prices in a cyber-competitive frenzy.

Statistics:

  • The IBM researchers suggest that the internet may lead to a never-ending cycle of commercial war, undermining the system's tendency to efficiently self-organize itself.
  • The US airline industry's deregulation in the 1970s led to price wars that lasted into the 1980s, resulting in industry-wide unprofitability.
  • The IBM work models the economy as a free-market economy of software agents, where prices are determined by the interaction of these agents.
  • The researchers use mathematical economics to model the price dynamics in this economy, suggesting that the results may be a commercial horror.

Sources:

  • IBM researchers, "Price-War Dynamics in a Free-Market Economy of Software Agents," (available at www.ibm.com/iac/high.html)
  • The Age, "Economists warn of Internet price war," (article not cited, but referenced by the IBM researchers)
  • Jerry Yang, founder of Yahoo!
  • Jeff Bezos, founder of Amazon.com