Reinventing the Bazaar: A Natural History Of Markets

a. In 2000, Bill Gates highlights the impacts of the internet on our modern economy at the World Economic Forum. He states that markets are "based on the sellers finding the most appropriate buyer" (48). Before the internet was invented, finding the most appealing price of a good was costly in terms of the time it took consumers to find the appropriate buyer. It was also costly for sellers to get information about the prices that consumers were demanding. Sellers faced "cost of production and of establishing a distribution network." (48). The internet added a new dynamic that evolved the marketplace, information became available at a finger tip. In our modern economy, the internet has allowed corporations to bypass the "middle man" and do business directly with the consumer. The internet has revolutionized the transactions and relations between the seller and buyer. This is evident in the daily transactions that we, the consumers make over the internet through online markets such as Amazon, eBay and other various sites.

b.Transaction costs by definition is the exchange and purchase of a good between the buyer and seller. The author states that the information and the time it took to gain knowledge of the market place is a small transaction cost on its own. These small transaction costs accumulate over time because the time it takes consumer to make comparisons between merchants is too costly. Therefore each seller can be considered as a monopolist, because they are able to lock in consumers and leave little room for bargaining. The remaining transaction costs arise from "difficulties of observing quality''. Although the internet have eliminated small transaction costs of time, it by no means ''created a perfectly frictionless market. Instead it has heightened the need for buyers to be able to trust sellers" (50).

c.There are two main problems that arises with imperfect information. First, consumers are at a loss because they do not have the proper knowledge of the price a good. The consumers realize the cost of the time it would take to make proper comparisons between different sellers. Therefore they become locked in to the first seller they interact with and thus have a disadvantage. The second, is the price fluctuation between sellers of the same good or service. Although they have the upper hand in a transaction, they are at a disadvantage because they can not properly measure their potential revenue from a sale. The ultimate consequence then, is that imperfect information causes the market to be inefficient.