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.

Shopbots are agents that automatically search the Internet to obtain information about prices and other attributes of goods and services. They herald a future in which autonomous agents profoundly influence electronic markets. In this study, a simple economic model is proposed and analyzed, which is intended to quantify some of the likely impacts of a proliferation of shopbots and other economically-motivated software agents. In addition, this paper reports on simulations of pricebots - adaptive, pricesetting agents which firms may well implement to combat, or even take advantage of, the growing community of shopbots. This study forms part of a larger research program that aims to provide insights into the impact of agent technology on the nascent information economy.

We envision a future in which the global economy and the Internet will merge and evolve together into an information economy bustling with billions of economically motivated software agents that exchange information goods and services with humans and other agents. Economic software agents will differ in important ways from their human counterparts, and these differences may have significant beneficial or harmful effects upon the global economy. It is therefore important to consider the economic incentives and behaviors of economic software agents, and to use every available means to anticipate their collective interactions. We survey research conducted by the Information Economies group at IBM Research aimed at understanding collective interactions among agents that dynamically price information goods or services. In particular, we study the potential impact of widespread shopbot usage on prices, the price dynamics that may ensue from various mixtures of automated pricing ...

. 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.

for excellent research assistance. I also thank the Central Bureau of Statistics in Israel for making the

E-commerce will undoubtedly change the way business is done. But as we have said elsewhere, “technology changes, economic laws do not. ” Despite the changes introduced by e-commerce, many of the fundamental principles of competition will still be relevant. In this paper I investigate three aspects of competition in ecommerce: marketing, interconnection, and price matching. In each case I will describe the phenomenon, illustrate its relevance for ecommerce, and describe some research issues raised.

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.

This paper shows how firms' pricing and communications strategies may be affected by size of the Internet: firms have incentives to facilitate consumer search on the Internet, but only as long as the Internet's reach is limited. As the Internet is used by more consumers, firms' pricing and communications strategies on the Internet will mirror the strategies they pursue in a conventional channel. Firms can increase their market power by strategically using information on multiple channels to achieve finer consumer segmentation. The paper suggests directions the Internet might take and derives managerial implications. The findings generalize to other channels that allow firms to segment consumers and enable firms to inform consumers at low cost. - 1 - 1 Introduction It has been predicted from early on that the emergence of the Internet as a communications channel would lead to an information explosion. Forbes Magazine, for example, wrote on May 24th, 1994, "The barriers to good inf...

Price dispersion is ubiquitous in settings that closely approximate textbook Bertrand competition. We show (Propositions 1 and 2) that only a little bounded rationality among sellers is needed to rationalize such dispersion. A variety of statistical tests, based on data sets from two independent laboratory experiments and structural estimates of the parameters of our models, suggest that bounded rationality based theories of price dispersion organize the data remarkably well. Evidence is also presented which suggests that the models are consistent with data from a leading Internet price comparison site.