Imperfect Competition
Published online by Cambridge University Press: 06 July 2010
Summary
By Christmas of 1999, initial public offerings of dotcom companies had netted many of these companies millions of dollars in operating capital. The founders of these companies also acquired personal fortunes, based on the market value of the shares that they had retained. Investors went smug to their beds, while visions of huge profits danced in their heads.
The operating capital was quickly spent. The companies argued that this was an inevitable feature of growth. They would have to rely on advertising for most of their revenues, but only the most popular sites would be able to earn sufficient revenues from this source. The strategy, therefore, was to grow as quickly as possible, elbowing aside their dotcom competitors. Costs would initially be large and revenues small, but the potential for future profit justified these expenditures. Investors seemed not to notice the corollary of this argument, that most of the companies in which they had invested were doomed.
By Christmas of 2000, it had been realized that the potential for profit was much smaller than had originally been believed. A great many dotcom companies had “gone for a walk in the snow,” and the market value of the rest had imploded. The resources of these companies had been squandered for no evident gain.
The investors were credulous, but they weren't crazy. The advent of the dotcom companies represented the opening of an industry in which there are enormous economies of scale.
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- Information
- A Course in Public Economics , pp. 217 - 218Publisher: Cambridge University PressPrint publication year: 2003