The authors' model of Internet pricing competition shows how differences in switching costs, increasing returns to scale, and discount rates between pure and hybrid e-tailers affected their choice of pricing objective. During the run-up of Internet stocks, differences in these determinants motivated pure e-tailers to build their customer base, whereas hybrid e-tailers leveraged their relationship with existing (offline) customers. In the resulting two-tiered pricing structure, pure e-tailers offered substantially lower prices than hybrid e-tailers. The dot.com crash of April 2000 increased the discount rate for pure e-tailers. Using a longitudinal database of printer prices, the authors' model correctly predicts changes in overall price dispersion and the direction and magnitude of price changes for pure and hybrid e-tailers associated with this change in the financial markets. This study illustrates how changes in financial markets can affect pricing competition among Internet retailers in a single category.
Get full access to this article
View all access options for this article.
References
1.
Alba, J., J. Lynch, B. Weitz, C. Janiszewski, R. Lutz, A. Sawyer, and S. Wood (1997), “Interactive Home Shopping: Consumer, Retailer, and Manufacturer Incentives to Participate in Electronic Marketplaces,” Journal of Marketing, 61, 38-53.
2.
Arthur, W. B. (1996), “Increasing Returns and the New World of Business,” Harvard Business Review, 74, 100-109.
3.
Arthur, W. B. and A. Ruszczynski (1994), “Strategic Pricing in Marketing with Increasing Returns,” in Increasing Returns, and Path Dependence in the Economy, W. B. Arthur, ed. Ann Arbor: University of Michigan Press, 159-184.
4.
Bailey, J. P. (1998), “Intermediation and Electronic Markets: Aggregation and Pricing in Internet Commerce,” doctoral dissertation, Massachusetts Institute of Technology, Cambridge, MA.
5.
Baker, D. (2001), The New Economy Goes Bust: What the Record Shows. Washington, DC: Center for Economic and Policy Research.
6.
Barsh, J., B. Crawford, and C. Grosso. (2000), “How e-Tailing Can Rise from the Ashes,” McKinsey Quarterly, 2000 (3), 98-109.
7.
Brynjolfsson, E. and M. Smith (2000), “Frictionless Commerce? A Comparison of Internet and Conventional Retailers,” Management Science, 46, 563-585.
8.
Cao, Y. (2002), “Three Essays on e-Tailer Pricing, Service and Customer Channel Usage in the Internet Market Place,” doctoral dissertation, University of Iowa.
9.
Clay, K., R. Krishnan, E. Wolff, and D. Fernandes (2002), “Retail Strategies on the Web: Price and Nonprice Competition in the Online Book Industry,” working paper, Carnegie Mellon University, Pittsburgh, PA.
10.
Clemons, E. K., I. Hann, and L. M. Hitt (2002), “Price Dispersion and Differentiation in Online Travel: An Empirical Investigation,” Management Science, 48, 534-549.
11.
Da Silva, J. G. C. (1975), “The Analysis of Cross-Sectional Time Series Data,” doctoral dissertation, North Carolina State University.
12.
Day, G. S. and D. B. Montgomery (1983), “Diagnosing the Experience Curve,” Journal of Marketing, 47, 44-58.
13.
Fuller, W. A. and G. E. Battese (1974), “Estimation of Linear Models With Crossed-Error Structure,” Journal of Econometrics, 2, 67-78.
14.
Guiltinan, J. P., G. W. Paul, and T. J. Madden (1997), Marketing Management: Strategies and Programs, 6th ed. New York: McGraw-Hill.
15.
Gulati, R. and J. Garino (2000), “Getting the Right Mix of Bricks & Clicks,” Harvard Business Review, 78, 108-114.
16.
Hamilton, D. P. (2000), “The Profit Puzzle in Electronic Retail,” The Wall Street Journal, May 22, A1.
17.
Hayes, K. J. and L. B. Ross (1998), “Is Airline Price Dispersion the Result of Careful Planning or Competitive Forces?” Review of Industrial Organization, 13, 523-541.
18.
Helmore, E. (2000), “A Drop in Net Profits.” The Guardian (London), June 29, 10.
19.
Johnson, E. J., W. Moe, P. Fader, S. Bellman, and J. Lohse (2000), “On the Depth and Dynamics of Online Search Behavior,” working paper, Wharton School of Business, University of Pennsylvania, Philadelphia.
20.
Jones, M., D. L. Mothersbaugh, and S. E. Beatty (2002), “Why Customers Stay: Measuring the Underlying Dimensions of Services Switching Costs and Managing Their Differential Strategic Outcomes,” Journal of Business Research, 55, 441-450.
21.
Kane, M. (2000), “One-in-Four Suffer e-Shopping Failure.” ZDNET News, March 6. Retrieved from http://www.zdnet.com/
22.
Kaufman, L. (2000), “Bargains Fade as Retailers Push for Profits,” The New York Times, June 25, 1.
23.
King, A. M. (2000), “Valuing Red-Hot Internet Stocks.” Strategic Finance, 81, 28-34.
24.
Kirkpatrick, D. D. (2000), “Quietly, Booksellers Are Putting an End to the Discount Era.” The New York Times, October 9, A1.
25.
Klemperer, P. (1995), “Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics and International Trade,” Review of Economic Studies, 62, 515-539.
26.
Lohse, G. and P. Spiller (1998), “Electronic Shopping,” Communications of the ACM, 41, 81-87.
Noble, P. M. (1997), “The Pricing Process: The Choice of Pricing Objectives by Industrial Firms,” in Educators' Proceedings: Enhancing Knowledge Development in Marketing, Vol. 8, William M. Pride and G. Tomas M. Hult, eds. Chicago: American Marketing Association.
29.
Pan, X., B. T. Ratchford, and V. Shankar (2002), “Can Price Dispersion in Online Markets Be Explained by Differences in e-Tailer Service Quality?” working paper, University of Maryland at College Park.
30.
Quick, R. (2000), “Shoppers Find Blowout Sale on Net Is Over.” The Wall Street Journal, June 21, B1.
31.
Reichheld, F. F. and P. Schefter (2000), “E-Loyalty: Your Secret Weapon on the Web,” Harvard Business Review, 78, 105-113.
32.
Rock, J. (2000), “Dot-Coms Must Show Profits, or Will Be Shown the Door,” The Weekly Corporate Growth Report, No. 1114, October 16, 11109-10.
33.
Rosen, K. T. and A. L. Howard. (2000), “E-Retail: Gold Rush or Fool's Gold?” California Management Review, 43, 72-100.
34.
Shepard, A. (1991), “Price Discrimination and Retail Configuration,” Journal of Political Economy, 99, 30-53.
35.
Sinha, I. (2000), “Cost Transparency: The Net's Real Threat to Prices and Brands,” Harvard Business Review, 78, 43-50.
36.
Smith, M. D., J. Bailey, and E. Brynjolfsson (1999), “Understanding Digital Markets: Review and Assessment,” in Understanding the Digital Economy, E. Brynjolfsson and B. Kahin, eds. Cambridge, MA: MIT Press.
37.
Stigler, G. (1961), “The Economics of Information.” Journal of Political Economy, 69, 213-225.
38.
Urban, G. L., F. Sultan, and W. J. Qualls (2000), “Placing Trust at the Center of Your Internet Strategy,” Sloan Management Review, 42, 39-48.
39.
Valdes, S. (2002), “Pricing and Marketing Rules with Brand Loyalty,” working paper, Pontificia Universisas Catholica De Chile, ISSN 071-7593 (electronic version of 2/02).
40.
Veverka, M. (2000). “Where's the Next Tech Sweet Spot?” Barron's, January 3, 51.
41.
Willoughby, J. (2000), “Burning up?” Barron's, March 20, 29-32.
