Why do a few large companies dominate internet commerce?

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In summary: Retailers have always been able to sell more products online than in physical stores. The internet just makes it easier for them to sell more products. It's a typical power rule relationship that effects almost every large process in the universe. The how and why anyone company gets to its place on the curve has many reasons but the reason there are usually only a few very large examples of anything seems to be fairly universial even when we try our best to make all thing equal.
  • #1
Stephen Tashi
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I have the impression that internet commerce is an "oligopoly" - i.e. it is a market dominated by a few large companies. Is there something about the nature of internet commerce that makes this a natural outcome?

Perhaps internet commerce turned out to be a bigger job than "any guy with a computer" could handle. For example, whatever my complaints about the Amazon website, it is far superior to the websites of the old guard retailers like Sears, Lowes Hardware, Walmart. Is this because Amazon has superior resources or is it just a matter of corporate culture?

Is the oligopoly just a result of crowds of people attracting bigger crowds? - so whoever succeeded in attracting the first crowd won?
 
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  • #2
Stephen Tashi said:
Is the oligopoly just a result of crowds of people attracting bigger crowds? - so whoever succeeded in attracting the first crowd won?

When you say "internet commerce" are you asking about internet businesses like eBay or Amazon?
It seems that these kinds of businesses are open to all who can come in with innovative ideas to compete. However, if you're talking about search engines, I agree this is a tough market to enter. Google, Yahoo and Bing do dominate this area, and the big 3 may eventually become the big 2 or the big 1. Users obviously want the biggest, most efficient search engine available. However, there are many small specialized search engines.

http://webquest.sdsu.edu/searching/specialized.html
 
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  • #3
SW VandeCarr said:
When you say "internet commerce" are you asking about internet businesses like eBay or Amazon?
It seems that these kinds of businesses are open to all who can come in with innovative ideas to compete. However, if you're talking about search engines, I agree this is a tough market to enter. Google, Yahoo and Bing do dominate this area, and the big 3 may eventually become the big 2 or the big 1. Users obviously want the biggest, most efficient search engine available. However, there are many small specialized search engines.

http://webquest.sdsu.edu/searching/specialized.html

I include eBay, Amazon, Google etc. under one heading as oligopolists. i haven't seen statistics on internet sales broken down by company, but aren't retail sales on the internet dominated by a few large companies? Perhaps that just my impression. For example, I know many retail sellers of computer parts like NewEgg, Fry's, but their website's are primitive compared to Amazon's. (Perhaps they intend them to be that way). I agree that entering the internet retail market is easy insofar as it may be easy to have a website, but having a sophisticated website isn't something that many companies are able to master.
 
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  • #4
It makes sense to me to have one spot to do one thing. I don't need 10 places to buy a Weber grill. I'm going to visit the best place and buy it and move on with my life. Amazon is the best at the moment. Just like you don't need several places to discuss Physics. All you need is PF :)
 
  • #5
Big companies dominate commerce on the internet for the same reason big box stores dominate retail on the streets.

Most of the big box stores now also have internet sales. The online selection is larger than in the stores. Costco for instance, usually has free shipping. Shipping costs can be a deal breaker for online purchases.
 
  • #6
I think it's a matter of who you trust sending your credit card info to. A well-established company? Probably ok. Some guy with a computer? Probably not.

Luckily places like Ebay and Etsy exist to connect those small-time sellers to a well-established company that people trust buying from.
 
  • #7
Stephen Tashi said:
I include eBay, Amazon, Google etc. under one heading as oligopolists. i haven't seen statistics on internet sales broken down by company, but aren't retail sales on the internet dominated by a few large companies?

It's a typical power rule relationship that effects almost every large process in the universe. The how and why anyone company gets to its place on the curve has many reasons but the reason there are usually only a few very large examples of anything seems to be fairly universial even when we try our best to make all thing equal.
http://en.wikipedia.org/wiki/Power_law
 
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  • #8
edward said:
Big companies dominate commerce on the internet for the same reason big box stores dominate retail on the streets.

But what are those reasons? Does it take as much of an investment to start an internet retail company as it does to build a chain of brick-and-mortar retail stores?

It doesn't surprise me that many retail stores sell more on the internet than from brick-and-mortar stores. I may have the wrong impression about internet retail sales, but I don't think of Sears, Kmart, and many other big brick-and-mortar retailers as being dominant internet retailers. Do they do as much business as Amazon or eBay?

nsaspook said:
It's a typical power rule relationship that effects almost every large process in the universe.

That rule describes the outcome of processes, but it doesn't explain why they turn out that way.
 
  • #9
a company, team, or such is only as good as the person running it.
 
  • #10
Well, I can see some reasons:
- A bigger online store has more reputation, and reputation brings more costumers, and more costumers bring more reputation.
- A big store has the ability to have more products on sale, so costumers will prefer going there since they can more easily find what they want.
- They're not innovations-driven businesses. This matters because once there's a big site like Amazon, it's hard for other company to compete with it, because everyone already uses it. Since there isn't much room to innovate in this sector, you can't really offer anything else than Amazon offers with some innovation. This isn't the case in other sectors: for example Facebook beat every other social network because of many innovations, and some were very big already (like Orkut, Hi5 and MSN).

It is an oligopoly, but I don't see that it harms costumers. I see it as a good thing, because I can get products for low prices in a safe and fast way in one site.
 
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  • #11
Greg Bernhardt said:
It makes sense to me to have one spot to do one thing. I don't need 10 places to buy a Weber grill. I'm going to visit the best place and buy it and move on with my life. Amazon is the best at the moment. Just like you don't need several places to discuss Physics. All you need is PF :)

Amazingly you can support both Amazon and PF at the same time!

https://www.physicsforums.com/showthread.php?t=473931
 
  • #13
There are very large companies with diffuse distribution networks. Most Amazon packages look pretty uniform, but they come from all over. Amazon affiliates ship from everywhere.
 
  • #14
Stephen Tashi said:
I have the impression that internet commerce is an "oligopoly" - i.e. it is a market dominated by a few large companies. Is there something about the nature of internet commerce that makes this a natural outcome?

Perhaps internet commerce turned out to be a bigger job than "any guy with a computer" could handle. For example, whatever my complaints about the Amazon website, it is far superior to the websites of the old guard retailers like Sears, Lowes Hardware, Walmart. Is this because Amazon has superior resources or is it just a matter of corporate culture?

Is the oligopoly just a result of crowds of people attracting bigger crowds? - so whoever succeeded in attracting the first crowd won?


The reason is because these were the ones that were able to achieve economies of scale. When you serve a bigger audience, the company is going to get bigger.

So why doesn't just anyone get big? Well, you're right, it is a bigger job than just anyone with a computer can handle alone. But that's true of most businesses. Starting a company is hard work and there's many tasks that need attending to. It's very rare for a company to grow huge from just one person, often times big successful companies start with a founding team.
 
  • #15
I believe that a lot of these companies (in particular social media) try to achieve network effects, which are a very powerful force in determining the terrain of tech industries.

For instance, consider what Google is trying to do over the last few years. No longer is Google simply a place to search. You've now got your Gmail linked to your Google searches, linked to your G+ (something which has not really been widely adopted yet, but the attempt is there). Google is trying to link their services in a way that makes it more valuable to you when other people are also using their services.

If they can leverage their current status as the go-to search engine to accomplish this, they will have gone a long way towards protecting themselves against competitors which may arrive down the road, because strong network effects often lead to an important determinant of customer retention in these industries,which is significant switching costs.

There are of course many other reasons, but network effects and high switching costs are particularly easy to achieve for web-based companies. These had not been explicitly mentioned here yet and they occur to me as quite important to this discussion.
 
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Related to Why do a few large companies dominate internet commerce?

1. Why do a few large companies dominate internet commerce?

The domination of a few large companies in internet commerce can be attributed to several factors. One of the main reasons is their strong brand recognition and customer loyalty. These companies have established themselves as household names and have built a loyal customer base over the years. Additionally, these companies have a vast amount of resources and capital to invest in technology, marketing, and infrastructure, giving them a competitive advantage over smaller companies. They also have a strong network effect, where the more users they have, the more valuable their platform becomes, making it difficult for new companies to enter the market.

2. What makes these large companies successful in internet commerce?

The success of these large companies can be attributed to their ability to provide a seamless and convenient user experience. They have invested heavily in technology and have developed user-friendly platforms that make it easy for customers to navigate and make purchases. These companies also have a wide range of products and services, making it a one-stop-shop for customers. Additionally, they have a strong supply chain and logistics network, enabling them to deliver products quickly and efficiently.

3. Are there any downsides to having a few large companies dominate internet commerce?

While the dominance of a few large companies in internet commerce has its benefits, it also has its downsides. One major concern is the lack of competition, which can lead to higher prices for consumers. It also creates a barrier for smaller companies to enter the market and innovate, as they struggle to compete with these established giants. Additionally, the control of these companies over the market can limit consumer choices and potentially stifle innovation in the industry.

4. Can small businesses compete with these large companies in internet commerce?

While it may seem challenging for small businesses to compete with large companies in internet commerce, it is not impossible. Small businesses can focus on a niche market, providing specialized products or services that may not be offered by the larger companies. They can also leverage social media and other digital marketing channels to reach a wider audience and build a loyal customer base. Additionally, small businesses can partner with other companies or use platforms like Amazon or Etsy to sell their products, gaining exposure and reaching a larger customer base.

5. How can governments regulate the dominance of these large companies in internet commerce?

Governments have implemented various regulations and antitrust laws to prevent the dominance of large companies in internet commerce. These laws aim to promote fair competition and protect consumers' interests. Governments can also promote the growth of small businesses by providing incentives and support programs. However, regulating the dominance of these companies can be challenging, as they have a significant impact on the economy and can adapt to changes quickly.

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