No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Six: Applications in Markets 139 THE INTERNET: MAKING TRANSACTION COSTS OBSOLETE? The internet really “came of age” in the late 1990s, with the promise of transforming commerce. The hype helped to energize the tech bubble in the stock market (but did not cause it—see chapter 10) and threatened to put an end to “bricks and mortar” capital costs since ecommerce doesn’t need fancy mall space to sell goods. The Department of Commerce statistics show that ecommerce as percentage of retail sales has grown steadily in the last decade— from .6% in 1999 to almost 12% in 2020. The internet has reduced the cost to gather information, reduced personal shopping costs (both time and transportation to the store), and has developed ways to reduce bargaining costs and enforcement costs. Many people buy all their Christmas presents online, and I certainly couldn’t have written or distributed this book without the Internet. The Internet is perhaps the greatest reducer of transaction costs ever—but it does not eliminate them. For instance, how much time do you spend “surfing the net” to find the best deal? If you ever shop at Best Buy or Walmart for an electronics product, for example, you have bought from a middleman. Walmart and Best Buy do not make the product; they make their money by offering a value-added service for you, the customer. The primary service one gets from a middleman is delivery of the good at a desired time and location in a specified fashion (quality, quantity, etc.). Yes, you could buy the product online, but it might take a week or so to get the product unless you want to pay an exorbitant “next day air” fee—in any case you can’t have it right now . Walmart has one of the world’s most advanced inventory and transportation systems to ensure you have the product you want at the lowest price possible. Imagine how much costs would increase if Pioneer (or JBL or Sony) had to develop its own product distribution system. By concentrating on what they do best (producing the electronic device), they leave the distribution to others who likewise specialize in that aspect of the production process, and we receive some of the gains from specialization. Did what we just cover sink in? Until the camera or compact disc player is in your hands , it is not completely produced. Just like the strawberries in Detroit, you are buying a service that is produced—you are not just buying the product. You are buying a product that is delivered to you in a certain timeframe, location and packaging. Once you realize this, you will understand that, in effect, there are no middlemen that need to be eliminated. This doesn’t mean, of course, that we can’t strive to make an even more efficient production process that might eliminate some production steps. While many decry the middleman, the same people will often lament the decline of small town businesses as these middlemen have found they can’t compete with larger providers of delivery services. The second main function of the middleman is to reduce search and information costs. Going to Best Buy will allow you to look The second main function of the middleman is to reduce search and information costs. The primary service one gets from a middleman is delivery of the good at a desired time and location in a specified fashion (quality, quantity, etc.).