Brief Summary
This is an academic blog. The purpose of this blog is to show the features of Taobao in moving towards a perfectly competitive marketplace.Despite the fact of truly perfect competition is impossible to exist in the real world; Taobao however has the potential characteristics which help it drive towards a perfect competition market.
Introduction
Not too many years ago
most people shopped in physical stores complete with parking and weather
problem, long lines, and wobbly shopping carts. In an era of continuous technological
advancements, the way of purchasing product through internet is now a popular
alternative for traditional method. Internet users use the internet to buy or
sell product such as food, clothing, music or travel packages. As the trend of
online shopping is becoming popular, it is benefiting both seller and consumer
in the sense of convenience. Online shoppers can simply access online stores from
their computer or smart phone whenever they have free time available while
online sellers can easily open an online store to run their business. Moreover,
the price information is easily available for both online shoppers and seller.
In China, the internet
market has grown at a rapid pace which overtakes the U.S. as the biggest
internet market since 2008. The internet users in China are also having the
highest frequency of performing online shopping among the world. New sales
platforms is appearing online every day, however the most popular platforms
among China internet users is Taobao which is similar to eBay or Amazon.
About
Taobao
Taobao (www.taobao.com)
– meaning “digging for treasure” is the biggest domestic online shopping
website in China. It was launched in May 2003 by Alibaba Group Taobao provides
a range of benefits to its users such as information on product
availability/competition and comparison product prices and market-determined
price.
Large
number of small firms selling identical product
>Criteria 2:
No barrier to entry
No barrier to entry
>Criteria 3:
Price taker
Price taker
>Criteria 4:
Perfect Information
Perfect Information
>Criteria 5:
3M Rule - Profit Maximizing = Marginal Revenue = Marginal Cost
3M Rule - Profit Maximizing = Marginal Revenue = Marginal Cost
>Criteria 6:
Perfect elastic demand curve
Perfect elastic demand curve
>Criteria 7:
Firms can make super-normal profit in the short run, but only can make normal profit in the long run.
Firms can make super-normal profit in the short run, but only can make normal profit in the long run.
>Criteria 8:
Supply curve is Marginal Curve and above shut down point
Supply curve is Marginal Curve and above shut down point
>Criteria 9:
Productive efficiency and Allocative efficiency
Productive efficiency and Allocative efficiency
Taobao
Drive Toward A Perfectly Competitive Market
To run a Taobao store is one of the best ways for young entrepreneurs to find success. Once the sellers have a basic knowledge of using computer, what they need to do is only require opening an online store on Taobao with no register fee needed. With this sort of convenience, everyone has the ability to run a business on Taobao which create a no barrier to entry to the market. Likewise, all sellers on Taobao are not prevented from leaving the industry.
With increasing demand for Taobao service, there is a significant increase in supply for Taobao service in the mean time. It provides more than 800 million product listing and serves more than 500 million registered users worldwide as of June 2012. Based on the figure, it indicates that Taobao has a very large number of seller and buyer.
In additional, most sellers in Taobao are young Chinese entrepreneurs and they are very small in capacity. They do everything from taking order from customer to delivering product to customer. However, no individual seller in Taobao has the power to influence the market price because many people open a Taobao store and sell nearly identical products and offer price match to the market. Since the sellers have no power over the market price, they have to accept whatever price which set by the price mechanism.
According to Robert Kuttner in Brynjolfsson & Smith (2000), the Internet is a nearly perfect market because information is instantaneous and buyers can compare the offerings of sellers worldwide. Both buyer and seller on Taobao have nearly perfect knowledge about price distribution. Taobao provides well product information for seller to know the price from their competition and for buyer to make a more informed purchase. If an individual seller trying to set the price higher than the market price, the seller will end up loss the entire sale as the buyers can easily find an alternative seller who sell the same product with market price. On the other hand, it has no reason for seller to sell products which lower than its rivals because they can sell any level of output. Therefore, although the seller cannot set the price, but they can choose the level of output they want to sell to generate higher profit.
To run a Taobao store is one of the best ways for young entrepreneurs to find success. Once the sellers have a basic knowledge of using computer, what they need to do is only require opening an online store on Taobao with no register fee needed. With this sort of convenience, everyone has the ability to run a business on Taobao which create a no barrier to entry to the market. Likewise, all sellers on Taobao are not prevented from leaving the industry.
With increasing demand for Taobao service, there is a significant increase in supply for Taobao service in the mean time. It provides more than 800 million product listing and serves more than 500 million registered users worldwide as of June 2012. Based on the figure, it indicates that Taobao has a very large number of seller and buyer.
In additional, most sellers in Taobao are young Chinese entrepreneurs and they are very small in capacity. They do everything from taking order from customer to delivering product to customer. However, no individual seller in Taobao has the power to influence the market price because many people open a Taobao store and sell nearly identical products and offer price match to the market. Since the sellers have no power over the market price, they have to accept whatever price which set by the price mechanism.
According to Robert Kuttner in Brynjolfsson & Smith (2000), the Internet is a nearly perfect market because information is instantaneous and buyers can compare the offerings of sellers worldwide. Both buyer and seller on Taobao have nearly perfect knowledge about price distribution. Taobao provides well product information for seller to know the price from their competition and for buyer to make a more informed purchase. If an individual seller trying to set the price higher than the market price, the seller will end up loss the entire sale as the buyers can easily find an alternative seller who sell the same product with market price. On the other hand, it has no reason for seller to sell products which lower than its rivals because they can sell any level of output. Therefore, although the seller cannot set the price, but they can choose the level of output they want to sell to generate higher profit.
Despite of the fact, there is still an opportunity for a Taobao seller to make super-normal profit in the short run.
For example:
Sharon is a milk seller who runs a Taobao store. An
article about benefits of drinking milk is release on the newspaper. 
In Diagram 1, it indicates that demand curve in milk industry swift to the right and supply curve remains constants in the short run. For Sharon’s Taobao Store, the level of output swift to the right and the price is rises from P1 to P2. In other words, demand for milk has increased while new firms are not able to get into the milk industry in the short run. As the result of increasing in demand, there is new price equilibrium (E2 ) for milk. As a profit-maximizing (MR=MC) milk supplier, Sharon supply the quantity of milk that equates the going market price with marginal cost. Therefore, the quantity supplied by Sharon at a P2 price is the Q2 units of milk. 
Interpretation of Diagram 2:
At price P2, ATC > P > AVC which mean total revenue falls short of total cost, meaning Sharon incurs a subnormal profit. In spite of the loss, because the price exceeds average variable cost, Sharon can minimize loss by selling the quantity of output that equates marginal revenue and marginal cost. In the other words, Sharon receives enough revenue to cover all variable cost but unable to pay for the fixed cost. At price P3, when P < min AVC, it indicates that Sharon does not generate enough revenue per unit of milk sold to cover the variable cost incurring each unit of milk. Sharon is indifferent at this point, she can either choose to continue to run her business or leave the industry. No one would produce at P4 because there is a totally loss at the point below P3.
At price P2, ATC > P > AVC which mean total revenue falls short of total cost, meaning Sharon incurs a subnormal profit. In spite of the loss, because the price exceeds average variable cost, Sharon can minimize loss by selling the quantity of output that equates marginal revenue and marginal cost. In the other words, Sharon receives enough revenue to cover all variable cost but unable to pay for the fixed cost. At price P3, when P < min AVC, it indicates that Sharon does not generate enough revenue per unit of milk sold to cover the variable cost incurring each unit of milk. Sharon is indifferent at this point, she can either choose to continue to run her business or leave the industry. No one would produce at P4 because there is a totally loss at the point below P3.
In long run, a perfect competition firm’s profit are
always equal to zero which mean Sharon’s profit will fall back from supernormal
profit to normal profit as new firms come into milk industry. As a result, supply curve in Diagram 3 shift to the right. Thus, Sharon has been forced back to sell at price
equated marginal cost for every unit of milk sold.
In term of the market, efficiency is achieved by the equality between the willingness to pay for a good at certain price by consumer and willingness to accept a certain price for a good by supplier. According to AmosWeb, it defines that in a perfect world, competitive markets automatically achieved efficiency at equilibrium. In Taobao case, even through Taobao is yet a perfectly competitive market, but both buyer and seller are perfectly price informed. Buyers are able to search products in Taobao using relevant keywords and compare the information about the product regarding on price or the reputation of the seller. Though this system, sellers can easily make adjustment for their price to meet the market price. With this advance system, Taobao is leading to greater market efficiency.
As we have seen, though perfect competition theory can potentially contribute to explaining the greater wealth-producing potential of market-based economies on efficiency grounds, but it cannot explain their greater quality. Therefore, I think it is a good intention for TaoBao to drive toward to the perfectly competitive market so that the goal of productive and allocative efficiency can be achieved. However, most of the goods sold of Taobao are not quality guarantee. In other words, some of the buyer are worried to be tricked with fake product especially food.(Bergman, 2011) Therefore, TaoBao should focus on improving the quality of their goods available.
Market
Efficiency
In term of the market, efficiency is achieved by the equality between the willingness to pay for a good at certain price by consumer and willingness to accept a certain price for a good by supplier. According to AmosWeb, it defines that in a perfect world, competitive markets automatically achieved efficiency at equilibrium. In Taobao case, even through Taobao is yet a perfectly competitive market, but both buyer and seller are perfectly price informed. Buyers are able to search products in Taobao using relevant keywords and compare the information about the product regarding on price or the reputation of the seller. Though this system, sellers can easily make adjustment for their price to meet the market price. With this advance system, Taobao is leading to greater market efficiency.
Is
it good for TaoBao to be a Perfectly Competitive Market in the future?
As we have seen, though perfect competition theory can potentially contribute to explaining the greater wealth-producing potential of market-based economies on efficiency grounds, but it cannot explain their greater quality. Therefore, I think it is a good intention for TaoBao to drive toward to the perfectly competitive market so that the goal of productive and allocative efficiency can be achieved. However, most of the goods sold of Taobao are not quality guarantee. In other words, some of the buyer are worried to be tricked with fake product especially food.(Bergman, 2011) Therefore, TaoBao should focus on improving the quality of their goods available.
Conclusion
According to taobaofieldguide.com, time saving is
not only benefits of using Taobao but consumer can also get some great deal
from Taobao which can lead to a significant improvement in market efficiency.
Even though, the features of Taobao is not hundred percent fulfilled the characteristics
of being a perfectly competitive market. However, the effort of solving
conflict between seller and buyer by Taobao is a good evidence to proof that
Taobao is moving toward to a perfectly competitive market. It is also important
for business to understand how Taobao creates ‘near perfect’ market conditions
with challenging conditions in the form of market driven price and wide
consumer choice.
Referencing
List
AmosWEB
Encyclonomic WEB*pedia,2013, Market
Efficiency, accessed June 7 2013, [http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=market+efficiency]
Brynjolfsson, E. &
M. Smith. (2000), Frictionless commerce “A
comparison of Internet and conventional retailers”, Management Science 46
(4), 563-585
Business Wire, 2013,
Taobao Marketplace and Juhuansuan Lauch Juhuasuan Overseas Group Shopping
Platform in Hong Kong and Taiwan, accessed 7 June 2013, [http://www.businesswire.com/news/home/20130407005089/en/Taobao-Marketplace-Juhuasuan-Launch-Juhuasuan-Overseas-Group]
Go2Taobao.com’s
Channel 2013, Youtube, accessed 7 June 2013, [https://www.youtube.com/watch?v=EUUcalyPmzk]
Justin, B 2011, The eBay of the East: Inside Taobao, China’s Online Marketplace, Time World, accessed 7 June 2013, [http://www.time.com/time/world/article/0,8599,2098451,00.html]
Justin, B 2011, The eBay of the East: Inside Taobao, China’s Online Marketplace, Time World, accessed 7 June 2013, [http://www.time.com/time/world/article/0,8599,2098451,00.html]
PR
Newswire, 2013, StockCall Study :
China’s Huge Internet market Offers Major Opening to Baidu and SIna,
accessed 7 June 2013, [http://www.marketwatch.com/story/stockcall-study-chinas-huge-internet-market-offers-major-opening-to-baidu-and-sina-2013-02-11]
TaoBaoFieldGuide, 2013,
What is Taobao, accessed June 7 2013, [http://taobaofieldguide.com/what-is-taobao/what-is-taobao]
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