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Explaining the E-Commerce Equilibrium

In U.S. Warehouse Market Getting Closer to Balance, Erica E. Phillips discusses the warehouse market’s potential approach to equilibrium. In the past couple of years, the supply of available warehouses was not able to sustain the exponentially increasing demand for warehouse space. This is evident in the slight decline in the availability of industrial real estate across the United States—dropping by less than one-tenth of a percent every quarter in the past two years (from 2016 to 2018), in contrast to dropping by two-tenths of a percent every quarter in the four years prior (from 2012 to 2016). To get closer to sustaining the increasing demand, warehouse developers have been constructing new buildings at a rapid pace, with 216 million square feet of new warehouse spacing opening up in the United States for 2017—a 12% increase from 2016. Yet this reason as to why supply can catch up to the incredible demand is likely because the demand for warehouse space has slowed down to a halt.

This phenomenon can be explained through Network Effects, where the price is defined by the warehouse developers and consumers are businesses interested in purchasing/renting warehouse space. With the monumental increase in e-commerce sales over brick and mortar sales, especially with the implementation of technological innovations, many businesses are attempting to participate in the lucrative e-commerce business realm. As such, when the market share of warehouse purchases slightly passes the low equilibrium, the Network Effect will drive shares toward the high equilibrium. This is because consumers would see the value in having warehouse space in this economy, making them wish they had bought the space at the current price—creating an upward pressure. Now that the demand has slowed down after reaching this new high equilibrium, supply is finally able to catch up, as stated in the article. With the warehouse market remaining at the stable, high equilibrium, warehouse developers now have the power to adjust price, and thus consumer behavior, however they best see fit. Due to the stability of the high equilibrium point, market share will always be under upward pressure or downward pressure to return to the high equilibrium. This will be the case in the warehouse market unless it somehow faces an extreme situation in which market share drops below the low equilibrium—potentially due to an reinvigoration of brick and mortar stores or bad publicity.


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