Six Myths of Information and Markets: Information Technology Networks, Electronic Commerce, and the Battle for Consumer Surplus1

The infusion of powerful information networks into business environments is beginning to have a profound impact on the nature of governance between buyers and sellers in the marketplace. Most articles in this area emphasize the benefits to the consumer side of the equation due to reduced coordination, search, and transactional costs. This article presents a broader view of information and markets by elucidating innovative ways that sellers can survive in intensely competitive markets. The article is framed in terms of six myths and counter-myths of information technology and effective markets. The myths provide a conventional view of how increased customization and outsourcing, open architectures, a larger customer base, and low price guarantees will benefit the buyer. The counter-myths illustrate that it is altogether feasible for IT to enable supplier strategies that extract consumer surplus. For instance, suppliers could use IT to price discriminate by tailoring product offerings and charging buyers as much as they are willing to pay. They could also segment markets making comparative shopping difficult, thus avoiding the competitive equilibrium. Also, suppliers could focus on the creation of networks that lock in customers or follow aggressive pricing strategies that deter price competition. Both the myths and counter-myths are presented and examined in a polemical format using simple, fundamental economic arguments. We hope to provide provocative new avenues for discourse in this area by recognizing the complexity of interactions between buyers and suppliers in a highly networked environment.