Question

You are the manager of Local Electronics Shop (LES), a small brick-and-mortar retail camera and electronics store. One of your employees proposed a new online strategy whereby LES lists its products at Pricesearch.com – a price comparison Web site that allows consumers to view the prices of dozens of retailers selling the same items. Would you expect his strategy to enable LES to achieve sustainable economic profits?

Answer 1

No this strategy will not enable LES to achieve sustainable economic profits due to intense producer-producer rivalry. Producer−producer rivalry means multiple sellers of a product competing to sell their good to a limited number of consumers.

Online price comparison sites are markets of intense producer-producer rivalry. There are many sellers and products are similar across sellers, low barrier on entry and that the main basis for competition is price, thus the industry rivalry would be very high and prices would be expected to be close to cost. Also, consumers have a variety of substitutes available, both for the products and the retail outlets from which they purchase. For these reasons, economic profits would likely be close to zero for the LES.