When online consumer markets first emerged, they were hailed for empowering shoppers, encouraging competition, and reducing costs. But it's been corrupted since then with online markets becoming markets in name only

By Ivailo Izvorski and Maria Gonzalez-Miranda*

Information technology is not just transforming markets; it is also making them ubiquitous, particularly for household consumers.

From pretty much anywhere in the world, one can now search out goods and services, compare prices from multiple sellers, and give detailed shipping and delivery instructions, all with a mouse click or a screen tap.

No doubt, this is a dream come true for anyone who grew up shopping in real, hands-on markets, with sellers displaying their wares on store shelves, on public squares, or along dusty roads. In many cases, routine purchases required long waits or extensive bargaining. But with online markets, savings are generated in many dimensions, and transaction costs are sharply reduced at all stages of the process.

Online markets have the potential to improve consumer welfare substantially, by fueling competition on price, efficiency, and customer experience, whether through search engines or single platforms such as Amazon. And if consumers spend smaller shares of their disposable income on each purchase they make, they will have room to consume more, thus boosting overall economic activity.

But are online markets meeting this potential?

If anything, the description above is already dated. Nowadays, online retailers use consumers’ Internet activities and other personal data to deliver “targeted pricing.” To take one particularly controversial example, airlines now use travelers’ data to customize ticket prices in ways that essentially cancel out the savings once offered by online markets.

Indeed, if you search online for a more expensive car or a more expensive vacation, that fact will be documented by tracking cookies or other means of online surveillance. And with these data, digital advertisers and retailers will offer you more expensive watches, home furnishings, or airline tickets than they would to a lower-income user searching within the same categories. And in some cases, they might even offer different prices to different people for the same good or service.

Part of the segmentation of online markets involves web companies testing price points to estimate precisely the demand curve and its links to household characteristics. For example, a May 2017 article in The Atlantic notes that, “As Christmas approached in 2015, the price of pumpkin-pie spice went wild. … Amazon’s price for a one-ounce jar was either $4.49 or $8.99, depending on when you looked.”

This form of price discrimination is legal as long as it does not occur on the basis of race, ethnicity, gender, or religion. Taken to the extreme, it means that data about our preferences, incomes, and spending patterns could soon be used to determine an individually calibrated price for all transactions. In that scenario, 100% of consumer surplus could potentially be extracted 100% of the time.

To be sure, price discrimination will not happen for every good and service, and the trend could be tempered by competition from offline retailers or new entrants vying for market share by offering lower prices to everyone. Alternatively, the data collected in some industries could become so widely shared across competing firms that they will all converge on a single price for each individual. In fact, companies today are probably already facing this kind of price segmentation, especially those that have amassed a lot of public data.

This suggests that markets could potentially become extremely fragmented, such that consumers’ choices will be strictly limited to the offerings that have been selected according to their data profiles. As any student of economics understands, this kind of situation decreases overall welfare, because every consumer will be forced to pay the maximum of what they are willing to spend for each good or service they purchase, keeping nothing “extra” for themselves.

Making matters worse, rapidly rising capital and skill requirements for production, among other factors, is sustaining a trend toward less competition among companies across a wide range of sectors in advanced economies. This, together with the systematic “extraction” of consumer surplus, will have far-reaching macroeconomic implications, particularly through changes in private consumption patterns. For consumers, the slice of the economic pie made available by their disposable incomes will shrink in real terms, leading to a fall in aggregate demand. Thus, at the end of the day, there will be less for everyone.

Amid the ongoing debate about how the dominant tech firms should and should not be allowed to use personal data collected from users online, many of these firms have continued to decide these questions for themselves – and, by extension, for the rest of us, too. For the sake of social welfare in the years and decades ahead, we must ensure that these decisions are compatible with the creation and maintenance of healthy, competitive markets. After all, a system that benefits consumers benefits everyone.


Maria Gonzalez-Miranda is Practice Manager in Macroeconomics, Trade, and Investment Global Practice at the World Bank. Ivailo Izvorski is Lead Economist in Macroeconomics, Trade, and Investment Global Practice at the World Bank.  Copyright: Project Syndicate, 2018, published here with permission.

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38 Comments

My experience buying online has been very disappointing. It is most often difficult to assess if the product will really do what one wants of it. Far too often when the product arrives it has faults that were hidden in the marketing information. I now prefer to purchase items that I can personally inspect at a shop.
This problem is exacerbated by the flood of goods not fit for purpose; especially the mass produced junk from places such as China. Our importers have much to answer for. They are surely costing NZ much as well as contributing massively to our landfills.

Seriously, what are you buying!? I think you are doing it wrong.

Clearing your cookies and searching using an anonymous browser and/or proxy server can help.

Personally, I hate shopping in physical shops and have been a predominately online shopper for a decade. However, NZ is way way behind on that front. Some of the websites and shopping platforms here are shocking. Very poor usability.

My wife and I walked down the local 'main street' yesterday, found it a bit creepy, we never go there anymore. What do we need, buy cars online or off friends, do the insurance and reg, diesel mileage online, dog reg yesterday, online, can't remember when I last wrote a check, all flights online, glasses of some outfit in Hong Kong.
Town is expensive, I tell my kids to keep away, money is hard to make in NZ, too precious to waste on the retail racket, got to save up for the extortionate rent.

... I steer clear of the nation's main streets to avoid charity muggers , youth gangs , and the homeless huddled masses in their filth ...

Town is grungy !

How's it compare to the Philippines? I suspect the towns are fascinating with great food and selling everything under the sun original and knock offs, cheap? I must go and have a look around.

I was looking (online) yesterday at the trans Siberian , stopping at Lake Baikal for a few days, 1100 Euros first class to Moscow.

I see even in our town the park benches have bars in the middle to stop people sleeping on them, well at least lying down. whats a poor man to do?

Hong Kong is still my fav haunt for knock-offs ... $ 25 Doc Martins ... a snip ...

... best shopping still is Bangkok and Singapore ...

Phils is getting expensive ... the new president whom the western world media hates is really cleaning up the place , and getting the economy humming .... but , our journalists over here don't bother to mention that ...

... I must protest to Fairfax ... about their biased reporting ... and about the new tabloid Press ... which is less insulating for us homeless souls on the cold Christchurch park benches at night ... bring back the good old broad-sheet you unfeeling nut-bars !

Peso has really plunged against the US under Duterte, however. Good for people remitting money to the Philippines, I guess.

Less so for people depending on local wages, when things are getting expensive as a result, as you mention...

GBH,

Well,that!s all right then. As long as the "economy is humming",why should we bother about people being killed without evidence,far less a trial,if the economy is doing well? You disappoint me.

... oh , dear dear ... poor lamb ....

Please don't attribute things to me which I did not say .... that is really stupid of you .... OK !

Manila is wonderful, such colourful communal living, the footpath full to the brim with people cooking and washing their babies in the gutter. Sure makes nz towns look bland with their swept streets and neatly trimmed greenery.

Sounds vibrant and diverse - ATEED will be jealous.

Yep, vmware + TOR, just boot up a known clean image everytime.

Plus don't forget the multiple layers of ad blocking and mining script filters, topped with multiple checks around the review, image search & product quality reports... even in a store or local site you cannot trust the stuff as far as you can throw it.

My daughter in London swears by Ocado, tells me she never goes into a supermarket anymore. She's the one who keeps telling me the big savings are in the everyday stuff, Vacuum cleaner bags nappies etc, she knows all the secrets after years with her husband as poor students. She also uses Facebook marketplace a lot.

I just gave my son-in law a Leatherman over $300 here but $58 in Texas, Leatherman Wave Plus. I buy all my books where possible from second sellers in the States. Just got a mint first edition of Scouting on two continents by Fredrick Burnham for nick's.

https://www.ocado.com/webshop/getCategories.do?tags=|20000|20002|40489&Asidebar=2

https://www.telegraph.co.uk/business/2018/05/17/ocado-strikes-transforma...

NZ consumers do get a bit reamed by retailers here. WORLD's example of buying a cheap AS Colour t-shirt, slapping a decal from AliExpress on it and selling it for $99 is only one example of this. I've come across a number of NZ companies drop-shipping AliExpress goods for massive mark-ups (or selling them in physical stores, likewise massively marked up).

I've even seen a down-town cafe selling items sourced from Daiso Queen Street for far more than the $3.50 you pay for them at Daiso.

Then there are all the funky new watch brands out there..
https://timeandtidewatches.com/how-to-start-your-own-minimalist-watch-br...

I bought my father a Dualit 2 slice toaster from Amazon UK and had it shipped direct to him for $230. The same item from local retailers is up to $500. It’s just one example of branded items I’ve sourced from overseas at big savings. I also use AliExpress extensively e.g. I just landed 15w dimmable MR16 LED bulbs at $4 each. Moves to tax those purchases won’t faze me as it won’t appreciably close the price gap. Even better I don’t have to use my time and petrol at $2.47 per litre to obtain them.

Good grief. A toaster for $230 ?  Petrol for $2.47/L ? Why pay such outrageos high prices on pupose? (especially for a low-class brand like Dualit. Dyson is the same - expensive but basic. You are just paying for snobby marketing.)

My mate in the marines always told me of the three great things from America, filson jackets Remington shotguns and Winston Churchill's mother who was a sport if nothing else.

Avgas. Gosh you'd think for 500 bucks it would be a four slice!
Well worth watching:

https://youtu.be/2liJn1dVoYU

Still, nice to have the odd nice thing.

We’ve had a four slice for 15 years. Apart from replacing the timer knob after year 12 it’s been absolutely fantastic. My father said it made the best toast he’s ever had, so I got him one. As for petrol, the X5 needs 98 and that was the price today.

Don’t dis’ the dualit. All the working parts are replaceable, it’s a toaster for life not just for Xmas. I’ve had mine for 15 years, never had to replace anything. Plus you can get good accessories, the toasting rack that sits on the top is a great idea.

... I was in the local library , scanning thru the back copies of the NZ Consumer magazine ( as one does ) ... when I chanced upon the April 2017 edition ... and lo .... toaster reviews !

The Dualit $ 499 machine scored just 56 % .... not recommended ... above it on 65 points was a $ 40 home brand toaster ... and top of the pile ,.the dozen or so machines rated higher than the very expensive English made Dualit 2 , was a basic Breville toaster ( made in China ) , 74 % rating .... $ 80 .... oooooops !

Yeah, it's nuts isn't it, the difference. I understand why both major parties have looked to put that GST in place though I'm not keen on it from my own selfish perspective, and as you say, it still doesn't narrow the difference that much.

If we could get Aldi and Ikea here in addition to Daiso, that would be great. Cheap, reasonable quality goods without shafting the consumer. I bought a $3.50 spatula a year ago to replace a $20 one from Stevens. Stevens' one lasted less than a month, and the Daiso one is still going strong after a year with no sign of giving up. Just a bit ridiculous, really.

The only spatulas worth having are those wooden-handled ones made by the Skyline company in the UK. They closed down in the 70s, but they still turn up in op shops. No other spatula has the optimum shape and rigidity of the Skyline. Skyline also made the only potato mashers worth a damn.

Have picked up some goodies from those millions of Chinese sellers on eBay. Got sick of having to shell out for replacements for those ridiculously fragile glass carafes in the coffee plunger, and bought one of those double-skin stainless steel ones from a hotel supplies eBay shop for less than the price of a new carafe here. Unbreakable in all normal domestic circumstances, and it keeps the coffee hot. Also good sources for all the stuff they're charging $20 for in Stevens, but at about $2 with free shipping.

NZ is absolutely plagued by monopolies and cartels and over-the-top markups from retailers who still think they have a captive audience waiting for the ship to arrive from Blighty and no other options.

Wasn't expecting to find such an expert on spatulas on Interest.co.nz

What a good start to the week!

Spatulas are Serious Effin' Business, yo.

Oh, and if anyone's looking for a really good knife at a reasonable price, go to eBay and search for 'Japanese carbon steel santoku'. You can thank me later.

... this internet malarkey is just a passing fad ...

Trust me ... we'll all be back into our favourite bricks and mortar malls and stores very soon ....

... yup ... nothing truer .... watch this space ....??? .... still watching ? ...

When I was a Lad, we did not have middlemen, we did door to door, eggs, milk, you name it..from Farmers..No not that one....Local hand milking ones....if we wanted a bed, we made it, if we wanted a screw, or a nut, we got married to a relative of a Smithy, same with a saddle, married a Saddler.

Divorce was unheard of,

Now we have drop shipping of all sorts of rubbish, 2 dollar shops, packed to the Rafters.

Can order a Bride, whatever you like....Import with ease.

Regarding Amazon, they often sell material products at a loss. In many ways their retail business is a loss leader for their very lucrative data services. I'm personally a fan of online shopping and I'll make a few interesting points below:

1. Here in Christchurch it's very difficult/impossible to find a plain (solid) coloured t-shirt, which is both long and slim fitting. JJ's, S&M's and Cotton On stock t-shirts for Asians and growing teens - they're ALL short. Places like Farmers, The Warehouse, and Hallensteins stock some long t-shirt but they're VERY, VERY wide! Everywhere else, plain t-shirts start from $60 in ChCh. Online shopping is the only answer.

2. I have a FAKE leather belt ($40 from Meccano here in ChCh) I use with my dress pants. Now, it's getting colder, I'm wearing Jeans more, I need a couple of leather belts for said Jeans .. I can't find any genuine leather belts in ChCh for less than $45. On AliExpress I can get TWO genuine leather belts (with NORMAL belt buckles !!) for $24, that's only $12 each !!

3. Finding dress shirts in ChCh is also mission. Same problems as before - no shortage of shirts featuring a wolf, star-child or some other tacky graphic. No shortage of short-sleeved, polyester rubbish. No shortage of flaming coloured pinstripes someone thought was progressive. No shortage of shirts I'd be swimming in! So online shopping it was - ASOS even allows me to send shirts back if the size is out. I got three fitted, plain dress shirts for $85 (free shipping).

4. Plain black socks .. here in Christchurch black socks are rear, like manna from heaven - If you come across some, you grab em!

5. Underwear, for a pair of boxer-briefs, even from the The Warehouse, you're looking at 20+, it's shocking! I've been buying my underwear from AliExpress for years now - $25 for a pack of four (free delivery).

6. Bags - I spent a whole day last year trying to find a respectable man bag or laptop bag - I had to go to three shopping malls and still ended up with a substandard bag!

Conclusion: In NZ (here in ChCh anyway) you CAN NOT get t-shirts, belts, socks, underwear, bags, etc - so yeah, I'm honestly not surprised with the number of people here that look like they've just rolled out of bed OR that retail is having a hard time. When retail outlets don't provide basic necessities, they become irrelevant and hopefully go into receivership.

Unfortunately NZ is rife with crony capitalism which sometimes enables poor business models to keep limping along. Also the financial sector here seems to direct fresh capital into property and stocks rather than fresh businesses models where the risk/reward ratio is higher. So yeah, these outdated shopping models might be sticking around for years to come.

You want to go to primark in the UK. Socks and undies etc seem to be about a 10th of the price of here, seem to last well too. And that is with a higher GST rate! We getting ripped here big time.

Shoes Dude, shoes.
Where fo you get dhoes!

Just be glad you didn't try to shop for a bra. That's the absolute worst in NZ, because requires a precision fit, and tough luck for anyone who isn't exactly average.

As for leather belts, bags etc, have you tried Etsy? Not necessarily cheap, and you have to keep an eye out for the re-sellers, but with a bit of searching you can buy something really good from the person who made it.

Consumers will need to learn to be savvy and shop between different (competing) sales platforms.

Its not even half done yet!
https://m.youtube.com/watch?v=iu5hTMlTU-U

I no longer shop at bookdepository.com as I noticed the fact that every time I looked at a title it would go up in price! I finally worked it out that they thought they could extract more from me, the more I looked at and wanted the book! WRONG! I hate being targeted and paying more than others for the same thing. This article has just confirmed what I knew. I have too many books anyway so they've lost me as a customer!

I recommend thriftbooks ( 2nd hand books from USA ).
I do notice that, just like book depository, they change prices as you get more interested.
https://www.thriftbooks.com/

One can never have enuf books!! :)

Brands that used to be available internationally on Amazon USA are now blocked for NZ. This might be because Amazon AU are selling it for more $, or maybe some local NZ retailer has the exclusive rights.