There have been many claims that the Internet represents a new nearly “frictionless market. ” Our research empirically analyzes the characteristics of the Internet as a channel for two categories of homogeneous products—books and CDs. Using a data set of over 8,500 price observations collected over a period of 15 months, we compare pricing behavior at 41 Internet and conventional retail outlets. We find that prices on the Internet are 9–16 % lower than prices in conventional outlets, depending on whether taxes, shipping, and shopping costs are included in the price. Additionally, we find that Internet retailers ’ price adjustments over time are up to 100 times smaller than conventional retailers ’ price adjustments—presumably reflecting lower menu costs in Internet channels. We also find that levels of price dispersion depend importantly on the measures employed. When we compare the prices posted by different Internet retailers we find substantial dispersion. Internet retailer prices differ by an average of 33 % for books and 25 % for CDs. However, when we weight these prices by proxies for market share, we find dispersion is lower in Internet channels than in conventional channels, reflecting the dominance of certain heavily branded retailers. We conclude that while there is lower friction in many dimensions of Internet competition, branding, awareness, and trust remain important sources of heterogeneity among Internet retailers.

As the Internet develops into a robust channel for commerce, it will be important to understand the characteristics of electronic markets. Businesses, consumers, government regulators, and academic researchers face a variety of questions when analyzing these nascent markets. Will electronic markets have less friction than comparable conventional markets? What factors lead to dispersion in Internet prices? What are the major electronic commerce developments to watch in the coming years? This paper addresses these questions by reviewing current academic research, discussing the implications of this research, and proposing areas for future study. We review evidence that Internet markets are more efficient than conventional markets with respect to price levels, menu costs, and price elasticity. However, several studies find substantial and persistent dispersion in prices on the Internet. This price dispersion may be explained, in part, by heterogeneity in retailer-specific factors such as ...

Several authors have argued that because modern computing and communications technologies reduce buyer search costs and other market inefficiencies, there should be intense price competition between sellers in electronic markets. This paper examines this prediction using data on the airline ticket offerings of online travel agents (OTA). We find that different OTAs offer tickets with substantially different prices and characteristics when given the same customer request. Some of this variation appears to be due to product differentiation -- different OTAs specialize by systematically offering different tradeoffs between ticket price and ticket quality (minimizing connections, depart or return when requested). However, even after accounting for differences in ticket quality, ticket prices vary by as much as 18% across OTAs. In addition, OTAs return tickets that are strictly inferior to the ticket offered by another OTA for the same request between 2.2% and 28% of the time suggesting tha...

. Shopbots are agents that search the Internet for information pertaining to the price and quality of goods or services. With the advent of shopbots, a dramatic reduction in search costs is imminent, which promises (or threatens) to radically alter market behavior. This research includes the proposal and theoretical analysis of a simple economic model which is intended to capture some of the essence of shopbots, and attempts to shed light on their potential impact on markets. Moreover, experimental simulations of an economy of software agents are described, which are designed to model the dynamic interaction of electronic buyers, sellers, and shopbots. This study forms part of a larger research program that aims to provide new insights on the impact of agent and information technology on the nascent information economy. 1 Introduction Shopbots, agents that automatically search the Internet for goods and services on behalf of consumers, herald a future in which autonomous agents become...

This study examines how much, if any, of the differences in retail gasoline prices between markets is attributable to differences in the composition of vertical contract types at gasoline stations in each market. The purchase of the independent retail gasoline chain, Thrifty, by ARCO provides a unique opportunity to examine the effects of changes in different vertical contract types on local retail prices. This event caused sharp changes in the market share of i) fully vertically integrated stations, and ii) independent stations; differentially affecting local markets in the Los Angeles and San Diego Metropolitan areas. Using unique and detailed station-level data, this study examines how these sharp changes affected local retail prices. The detailed data and the research design based on the Thrifty station conversions allow for credible estimation of the effects of the market share of independent retailers and vertically integrated retailers on local market prices, controlling for any omitted factors at the station level, and the city level over time. Results indicate that a decrease in the market share of independent stations has a significant positive impact on local retail price. However, a change in the market share of refiner owned and operated branded stations does not have a significant impact on local market price. These results have important implications as policy makers consider the regulation of vertical contracts as a means to increase competition in gasoline markets. The research design and detailed data also allow for inference on the underlying nature of retail gasoline competition.

Following Becker (1957) we ask whether competition eliminates the effects of behavioral biases. We study products with add-ons. In competitive markets with costless communication, Bayesian consumers infer that hidden prices are likely to be high prices. Hence, firms choose not to shroud information. However, information shrouding may occur in an economy with some myopic consumers. Such shrouding creates an inefficiency. Sometimes firms have an incentive to eliminate this inefficiency by educating their competitors ’ myopic consumers. However, if add-ons have close substitutes, a “curse of debiasing ” arises, and firms will not be able to profitably debias consumers by unshrouding add-ons. In equilibrium, two kinds of exploitation coexist. Optimizing firms exploit myopic consumers through marketing schemes that shroud high-priced add-ons. In turn, sophisticated consumers exploit these marketing schemes. It is

The sophistication of financial decisions varies with age: middle-aged adults borrow at lower interest rates and pay fewer fees compared to both younger and older adults. We document this patternintenfinancial markets. The measured effects cannot be explained by observed risk characteristics. The sophistication of financial choices peaks around age 53 in our cross-sectional data. Our results are consistent with the hypothesis that financial sophistication rises and then falls with age, although the patterns that we observe represent a mix of age effects and cohort

One widely-reported prediction is that the availability of low-cost information on price, specifically the rise of comparison shopping agents, will lead all Internet retailers to charge the same price for mass-produced physical goods and that price will be approximately cost. This prediction is, however, in tension with another prediction -- that firms prefer not to compete directly on price because of the low profits that result and so will seek to differentiate themselves. We investigate these hypotheses using a new data set of book prices for 107 titles sold by thirteen online and two physical bookstores. What we find is that controlling for book characteristics, prices in online and physical bookstores are the same. An average price of 85 percent of the publishers price and substantial price dispersion suggest that low cost information has not had the predicted effect on prices. Analysis of product differentiation yields no clear results, but the substantial premium Amazon charges for its books, even relative to barnesandnoble.com and Borders.com, provides indirect evidence of product differentiation. We would like to thank Bo-Han Chen, Kang-Bae Lee, and Yimin Yang for excellent research assistance, conference participants at the Second International Conference on Telecommunications and Electronic Commerce (ICTEC) for comments, and Y. S. Chi of Ingram Book Group for insights on the wholesale market for books. We would also like to thank Severin Borenstein and two anonymous referees for their insightful comments. 2

There is mounting empirical evidence to suggest that the law of one price is violated in retail financial markets: there is significant price dispersion even when products are homogeneous. Also, despite the large number of firms in the market, prices remain above marginal cost and may even rise as more firms enter. In a non-cooperative oligopoly pricing model, I show that these anomalies arise when firms add complexity to their price structures. Complexity preserves market power and corporate profits by bounding the financial literacy of consumers. As consumers find it more difficult to find the best deal, more of them optimally choose to remain uninformed about industry prices, which ultimately leads to price dispersion and failure of competition. Professional advice (i.e. an advice channel) removes this advantage, unless the firms increase aggregate complexity, decrease price dispersion across the industry, or institute incentive contracts with the advice channel. Because retail markets are extremely large, such practices have important welfare implications.

Using data collected between August 1999 and January 2000, we examine firm-level pricing strategies for thirty-two online bookstores. The data cover 424 books, including New York Times bestsellers, computer bestsellers, and random books. One prediction is that the reduction in search costs on the Internet relative to the physical channel would force prices to cost and standard deviation to zero, since no firm could charge higher prices. Between August 1999 and January 2000, standard deviation of price fell somewhat, and prices for the different types of books were flat or increasing and substantially above cost. Thus predicted price convergence has not yet occurred. Prices are, however, lower in segments with more competition, such as bestsellers, suggesting that some type of convergence may be happening in these segments. Interestingly the standard deviation of prices appears to be higher not lower in segments with more competition. Regressions to further investigate these effects suggest that increased competition as measured by an increase in the number of stores selling the book has different effects on price and standard deviation for different categories of books. Thus there is no clear relationship between competition and price or standard deviation. Firm level strategies vary across stores, with some specializing in certain types of books, others using the web as advertising, and still others offering low prices. For those offering low prices, most stores focused on marginally undercutting Amazon, usually by 10 cents or less. As of November 2000, some of these stores have gone out of business or changed their business model, and the surviving ones appear to still be at risk. We would like to thank Bo-Han Chen, Yimin Yang, Danny Fernandes, and Kartik Hosanager fo...