Why Should The Stock Of Generic.com Sell At Such A High Price?
ntrs.com
Northern Trust Research Desk
I agree with the New Error types that the Internet is a significant technological advance. It has greatly lowered the cost of information. In many of its retailing applications, the Internet has created a commercial environment that comes very close to the pure competitive model described in Econ 101, which, along with low cost information, includes low barriers to entry into the industry. An implication of the pure competitive model is that profits will be "normal." By normal, I mean equal to some sort of average return on capital for the economy as a whole. In a pure competitive model, profits are normal or average because the product being sold is generic in nature, all the firms involved face the same cost schedules, information is free, or nearly so, and the cost of entering the industry is very low. If above-normal profits are being made, new firms will enter, which will drive up everyone's costs, drive down the price of the product, and therefore, will reduce profits back down to a normal level.
Now, I don't want to name any names, but some Internet retailers are, for the most part, just distributors of a generic product. The barriers to entering e-commerce retailing are very low. And information abounds. There are free websites that will search the net for you to find the lowest selling price of the product. Why should the stock of these generic-product distributors being selling at such astronomical prices relative to their sales, forget profits?
I can understand how a supplier to the Internet industry, who has some proprietary product or service, could be expected to earn some above-normal profits. This would justify a high stock price for this supplier - either because of high current or expected earnings. But why is Generic.com selling at such a high price? |
