How We Create the Wealth of Nations
Chapter 9: Online and Local Booksellers
Now we turn to some contemporary examples of creative destruction. The first is one that would, surely, have been of great interest to Joseph Schumpeter. It is the competition between online booksellers, notably Amazon, and traditional bricks and mortar bookstores. THE INTERNET AND PERFECT COMPETITION In 2000, the Economist newspaper published a survey of Internet economics, with the bold conclusion (Economist, 2000): the Internet cuts costs, increases competition and improves the functioning of the price mechanism. It thus moves the economy closer to the textbook model of perfect competition. While all the assertions in the first sentence are correct, the conclusion in the second sentence has been shown to be quite wrong in some industries. It is true that online retailing may appear to level the playing field, and remove one of the main disadvantages facing small and remote businesses. But when the selling operation enjoys very substantial economies of scale and scope, the outcome is likely to be more concentration, and not perfect competition. One of the most powerful counterexamples to the idea that the Internet will lead to perfect competition has been in bookselling. Online bookselling has enabled a smaller number of large players (notably Amazon) to exploit economies of scale and has driven many smaller bookshops out of the market. And this is, perhaps, just one example of a more general phenomenon with online retailing
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