Oxford University Professor of Economics delivers retail competition lecture at Millfield

On Friday 28^th September, Dr Alexei Parakhonyak, a current Professor of Economics at Lincoln College Oxford University, presented a talk for Millfield Economics students on how the internet has reshaped competition in retail markets. Dr Parakhonyak showed how the largest companies that dominated the world in terms of market capital in 2005 have now been replaced with new firms, such as Apple and Amazon, due to technological advancements.

The students learned that 80% of the 10 largest companies in 2020 have a large platform part of their business, indicating this a major factor for the success of a company.

A key feature of the talk was understanding the concept of network effect, which was explained as being special types of externalities, those unlike pollution and congestion, when consumer’s utility from using a good or service positively depends on the overall number of consumers using the good or service. The example of Amazon was given in that having more buyers on this platform attracts more sellers, broadening the market. The increase in number of sellers attracts more buyers as there is more choice at lower prices due to stronger competition, leading to more consumers.

Another interesting point raised was how platforms only charge one side of the market the majority of the time. Google, for example, do not charge users per search yet they charge advertisers if a consumer clicks on a sponsored link (also known as click-through fees).

Students also learned that a strategic move for large selling platforms is to host rival’s products in order to gain prominence. This effect occurs because consumers will start their search with that firm as they know it includes a multitude of options. This contradicts traditional economics intuition that’s states direct price comparisons should be avoided as they will just end with monopoly pricing. This is not the case because companies make themselves first in the search-order, allowing them to capture a large part of demand. They may also generate revenue for firms in the form of selling or click-through fees when sampling competing products, further encouraging firms to adopt this technique.

“Dr Alexei Parakhonyak contradicted most of our beliefs that the accumulation of our data by online platforms and retailers is harmful by introducing the fact that it improves the quality of our search pools and dramatically reduces search costs as our preferences are known. Overall, the talk was highly informative on explaining how the internet has shifted business models towards ‘platforms’ that rely on network effects for growth.” – Lilly-Ann, Upper Sixth Economics student

After the talk, Dr Parakhonyak described how the entry process for Oxford was conducted for any students who were interested in applying to Oxbridge.

Learn more about Economics at Millfield here.