There have been many claims that the Internet represents a new "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 simply compare the prices posted by different Internet retailers we find substantial dispersion. Internet retailer price...
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