Prices on the Internet

Prices on the Internet

Jihui Chen (Illinois State University, USA)
DOI: 10.4018/978-1-61520-611-7.ch004
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Abstract

In the pre-Internet era, consumers relied on media such as Sunday newspapers and flyers for product and price information. Such a search process is time-consuming and unlikely to be exhaustive. Existence of incomplete information has been shown to lead to price dispersion (Stigler, 1961). Recent advances in information technology have dramatically changed the manner by which consumers and businesses gather and transmit information. With a few mouse-clicks, consumers are able to compare price information from a wide range of vendors. With the advent of the Internet, especially the introduction of price comparison sites or shopbots, competition among online retailers escalates and we might expect prices to converge in the new economy. However, substantially decreased transaction cost has apparently not led to online price convergence. An extensive literature on Internet pricing has documented persistent price dispersion in online markets. In this chapter, I review price dispersion and related literatures, and discuss future research directions.
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Background

When e-commerce was initially introduced, retailers selling (often inexpensive) search goods emerged first. The rise of consumer confidence in e-commerce, coupled with the development of information technology, has introduced (usually expensive) experience goods to e-commerce, as indicated by the delayed entrance of luxury goods onto the online marketplace. One direct benefit of e-commerce is cost savings, but it is unclear whether any of these are passed to consumers. One strand of early studies compares prices of matched products sold in both online and brick-and-mortar stores. Most of these studies report lower online prices (see Table 1), indicating the relative efficiency of e-commerce.

Table 1.
Empirical Studies Comparing Online and Offline Sellers6
ArticleData DurationProduct CategoryMain Findings
Price LevelPrice Dispersion
Bailey (1998)
Brynjolfsson and Smith (2000)
Garicano and Kaplan (2001)
Morton et al. (2001)
Lee and Gosain (2002)
Clay et al. (2002)
Brown and Goolsbee (2002)
Lee et al. (2003)
Ancarani and Shankar (2004)
Stylianou et al. (2005)
Zettelmeyer et al. (2006)
Chellappa et al. (forthcoming)
Sengupta (2007)
Ghose and Yao (2008)
1996-1997
Feb 1998 - May 1999
1999 – 2000
Jan 1999 - Feb 2000
Feb 1999 - Jan 2000
April 1999
1992-1997
2000 (Korea)
2002 (Italy)
Sept 2002 - April 2003
April - May 2002
3rd quarter 2004
2004
2000
Books, CDs, software
Books, CDs
Used-cars auctions
New cars
CDs
Books
Life insurance
CDs
Books and CDs
Over-the-counter pharmaceuticals
New cars
Airfares
Airfares
Hardware tools, office supplies, packaging materials
Higher online
Lower online
Higher online
Lower online
Comparable (current-hits)
Comparable
Lower online
Lower online
Lower online
Lower online
Lower online
Higher online
Higher online
Comparable
Higher online
(much) Lower online
Higher online
Higher online
Lower online
Lower online
Near-zero online dispersion

Key Terms in this Chapter

Price Dispersion: In a homogeneous product market, prices charged by different sellers are different.

Free-Riding: Online shoppers may still rely on expertise of in-store salespersons to learn about a product and other essential information, but choose to purchase online (for lower prices).

Price Partitioning: Retailers divide the total product price into different components – a base price and surcharges including shipping and handling, taxes, and other fees.

Law of One Price: In a homogeneous product market, all firms price at the marginal cost.

Price discrimination: Firms charge different prices to different consumers for an identical product.

Shopbot: A useful online search tool helps shoppers collect product information.

Multichannel Retailers: Retailers conduct businesses through multiple distribution channels.

Mixed Pricing Strategy: Profit-maximizing firms randomize equilibrium prices to discourage undercutting.

Channel Conflict: When a seller is present in multiple distribution channels, it needs to coordinate seamlessly across channels regarding store policies and prices.

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