2/19

The concept of ecommerce and internet business has always been interesting to me because the internet is a way, in my opinion, to create a much more efficient market because it reduces transaction costs by increasing the exposure of commercial parties. In other words, the traditional idea of a firm being a collection of long-term contracts starts to diminish as the internet allows firms to conduct business extremely easily. The theory is basically that individual agents in the economy would form firms that denoted a long-term commitment to doing business together, which basically meant they didn't have to negotiate terms for every daily task. With the internet, however, most of these negotiations can be extremely low cost because of the efficient market presented by practically everyone in the marketplace, at least for certain functions. For example, if I wanted someone to manage my HR, I would have to hire someone before because I could not be sure I could negotiate the terms each time I use the services. However, when there are multiple companies that I can outsource these functions to and the internet allows us to enact that transaction immediately, I can rely on a day to day (or at least more flexible) contract process to get work done. I find it interesting because I think that transaction costs and the adverse bargaining powers that are created by those transaction costs cause much of the economic inefficiencies (Coase theorem) in the market and the internet might be a way to eliminate some of those problems.

This is related, but I am also interested in how consumer spending is affected by the internet. There are two sources of online spending: replacement spending from brick stores, but also an increase in the turnover of money or the money velocity caused by having ready access to easily spend money online. Basically, before the internet it was "harder" to spend money because the person needed to incur significant transaction costs to go to the store, carry the goods home, etc. However, with the internet, you can spend money at the click of a button. You might pay for shipping, but fairly minimal. This causes the ability to turn over a dollar many more times each year because many agents are doing the same. So I sell something online and I immediately use that money to buy something online and that person immediately uses that money to buy something etc. The statistics indicate a huge spike in velocity in the 1990s, which I would attribute to the availability of the internet. Granted, the monetary policy should try to compensate for this effect because it will cause inflation. In sum, I think that the internet is changing gradually with the older generations, but will drastically change the economy and the way people do business as generations who grew up with the internet enter the workforce.