PAL, the problem with your proposal IMO is that it overlooks the effects of competition. To judge from appearances, e-commerce has the earmarks of a market structure known to economists as "pure competition." The salient characteristics of pure competition are easy entry, intense crowding, product homogeneity, and falling margins. Product homogeneity means that one firm's product or service is indistinguishable from another's, as in the agricultural markets (i.e., grade A wheat). This is why such markets are often referred to as "commodities." Firms enter into these markets in pursuit of profit, but because of lack of entry barriers and low capital requirements, overcrowding occurs. This causes margins to collapse, which forces some firms to exit the industry. The ones which survive are barely profitable. I thought Jock Hutchinson captured the elements of pure competition well in several recent posts, including this one:
Message 6594588
(I don't happen to agree with Jock, however, when he applies the commodity label to the pc market in which Dell competes)
But why then, you may ask, if profit prospects in e-commerce are so bleak as I have suggested are stocks such as Amazon.com and Yahoo red hot? I confess I haven't a clue to these stocks. IMO, a parallel can be drawn between these stocks and the tulip bulb mania in 16th Century Holland. By the time tulip bulb prices collapsed due to overproduction, it was apparent to everyone that tulip bulbs were a commodity. For some reason though, investors were unable to anticipate what was coming.
Regards,
Geoff |
