Does the Internet lower retail prices at an even rate across different industries? Is it the price point that explains any differences or are there other differentiating factors about an industry? (Catherine Dowdell, Racine, WI, USA)

The Internet certainly has a different impact on different industries. We don’t now know the impact on every industry, but existing evidence and some economic reasoning tells us that the Internet will have the largest impact in industries that are inefficient, or where retailers or other parts of the supply chain are earning economic profits. In these industries the Internet may be able to cut out some costs or cut out the profit-earning middleman.

Examples of more efficient Internet businesses might be iTunes, which does not have the inventory and distribution costs of CDs, or Autobytel.com which saves consumers the hassle and unpleasantness of bargaining with a car salesman. An example of a industry that earned profits because of high consumer search costs might be term life insurance (see Brown and Goolsbee, 2002).

We are a small-medium chain of pharmacies based in Northern Ireland. Our customer base is largely middle-aged - elderly. We are considering branching into e-commerce as a means of attracting new markets. Which demographic groups are most likely to be captured by e-sales?

Interestingly, there is quite a range of people who will be attracted by e-sales. Not surprisingly, young people who are familiar with technology is one major group. However, in our research on car buying, we found that people who disliked the traditional experience of buying a car tended to use the Internet, even if they were not a typical Internet user. Thus, if you have some clients who find it hard to get out and about easily, or have other reasons for finding shopping a hassle (e.g. working parents), I think you will find that they will be early users of your site. Of course, broadband penetration is an enormously important factor because it makes shopping online much easier.

Why do we find price dispersion in the Internet if information prices are close to zero? Should we expect more or less price dispersion in the Internet than in traditional markets? (F. Caballero, Brussels, Belgium)

This is a great question, and one that researchers continue to study to try to figure out the answer. One simple answer is that not all buyers search, even though it is very easy and almost costless to do so. However, this is not very satisfying since research has shown that we can get competitive outcomes even if there are some non-searchers.

Another answer is that it is very cheap to post prices on the Internet. It may be hardly anyone buys at the high prices we see, but those prices “count” as much as any other price when a researcher studies prices on the Internet. In other words, if we don’t know the volumes sold at the different prices, it is very difficult to know how much price dispersion is actually out there.

How does the Internet affect the European car market? I would also like to know if you think there should be just one price for all European consumers, independently of their country of residence. (Miguel Carvalho, Portugal)

I am not an expert on the European car market and the regulations that may cause differences across markets. However, clearly the Internet will allow people who are shopping for a car to see retail prices in different countries very easily. Since cars are expensive and discount airlines are now prevalent, it might well be worth a buyer’s time to fly to another country to purchase a car. Countervailing costs of registration and complying with local regulations may reduce arbitrage by consumers.

The second part of your question is hard to answer because there could be cost-based reasons for differing car prices across geographies. I would say I support free trade in cars with a minimum amount of regulatory interference, and would trust to that to provide as low price as possible to consumers in different locations.

What percentage of teenagers actively purchase goods on the Internet, given that credit cards are not available until they are 18 years old? What do they mainly purchase and why online not in retail stores? Is there any growth in the market for producing specialised debit cards for this age group? (Darrell Mott, UK)

I do not know what proportion of teenagers purchase goods online, but they are certainly constrained by the lack of a way to pay for goods and services in the US. Since this group has a lot of time to go online and quite a bit of spending money, I agree with you that a solution for online payment for them will have great demand.

In Japan, and increasingly in Europe, more services can be charged to a consumer’s mobile phone. Thus if a teenager gets a mobile phone (probably with help from his or her parent), and uses it to access the Internet, he or she can purchase items that become part of the phone bill.

In the US, iTunes has created accounts that can be funded by one party (the parent with a credit card) and then used to buy music by another party (the teenager). This seems like a great idea to me. Additionally, Paypal allows a person to pay for goods and services online with a direct debit from a bank account.

More generally, we have not yet seen the “cybercash” innovation that would make online business accessible to people without credit cards.

What are the ramifications of Canadian prescription drugs being sold through the Internet to American seniors? First, is this trade going to be curtailed as it is technically illegal? Second, at what point will the threat of prosecution for buying Canadian drugs online outweigh the benefits of lower prices for senior citizens? (Emmanuel Yujuico, Birmingham, UK)

The issue of importation of Canadian prescription drugs is greatly mis-understood. It is against the interests of the Canadians to allow a substantial amount of it, and thus I believe the actions of the Americans will not be critical.

The reason the Canadians will not allow it is that pharmaceutical firms will change their policies in ways that hurt Canadians if the Canadian and US market essentially become one. Canada is much smaller than the US. There is no possible way for Canada to supply any reasonable proportion of American prescription drugs without vastly expanding its purchases from pharmaceutical firms.

The drugs at issue are cheaper in Canada than the US for some reason; perhaps the Canadian government bargained hard for a low price on those particular products. When the pharmaceutical manufacturers find that many Americans are purchasing at the Canadian price, they will either refuse to sell more to Canada than Canadians need, or will raise the Canadian price to the level of the US price. Both shortages and higher prices are bad for Canada, and so they will act to shut down such trade.

Does not the process of price discovery on the Internet challenge the standard economic concept of pricing power residing with the seller to a model where pricing power now rests with the consumer? If so does this not imply that the consumer is a more powerful force in controlling inflation than the Federal Reserve Open Market Committee? (Robert Schumacher, Oakbrook Terrace, IL, USA)

A firm with market power cannot charge anything it likes but must work with the existing demand curve, or set of consumer valuations. If consumers can search much more cheaply than ever before, the firm may no longer have market power, i.e. it will have many more competitors than are in its geographical area. This intensification of competition is indeed good for keeping prices and inflation low. It is believed that the application of IT generally, not just the use of the Internet, is an important factor in the low rate of price increases we have experienced recently in the US. The Internet and the forces of competition, driven by consumers, is certainly part of that.

Will the US continue to lag more "connected" countries like South Korea and Japan in terms of Internet penetration and broadband speeds? If so, is this a negative for the standard of living for Americans relative to East Asians or is the US saturated enough with connectivity that this will not make a difference?

It is not clear if the US will continue to lag other countries in Broadband penetration. It is possible because other countries are more willing to mandate universal services and in the US we have more inequality of incomes, health, etc, so it seems logical we will also have inequality of Internet access. It is a negative for the standard of living of the people without the Internet access.

So much can be done online now that there is real time and hassle penalty for people who cannot use the Internet easily. For example, political and health information is online, shopping can be done there, communication with friends and school teachers can occur through email, a person can pay a parking ticket or make product comparisons. Of course, a person can head to the local public library to research the price of a new car, but the library will not replace home access for daily use.

Currently, it seems that eBay has monopolised the Internet auction market and it is growing fast in this lucrative business. How can another Internet auction company compete successfully with eBay? (Al Borzee, San Mateo, CA, USA)

eBay is the prototypical example of what is called “increasing returns,” “demand-side economies of scale” or “network externalities.” The idea is that the value to a participant of joining the network increases in the number of other users. If you are a seller, you want to list at the auction site with the most buyers. If you are a buyer, you want to search at the site with the most sellers. This leads the market to “tip” and all parties to coordinate on one site.

It is very difficult to unseat a leader in a market like this. One option is for a tightly coordinated group (e.g. the XYZ furniture association) to set up their own site for trading with lower fees. Such a site would then be more attractive to people who are interested in buying and selling that one category.