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.

/pdf/frictionless-commerce-a-comparison-of-internet-and-3046n37fzx.pdf

Frictionless Commerce? A Comparison of Internet and Conventional Retailers

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 4,500 price observations collected over a period of 9 months. We compare pricing behavior at 37 Internet and conventional retail outlets. We find support for the hypothesis of increased efficiency in Internet channels on several dimensions, but we also find evidence of considerable price dispersion. We find that prices on the Internet are 8-15% lower than prices in conventional outlets, depending on whether taxes, shipping and shopping costs are included. 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. However, we also find substantial price dispersion across retailers on the Internet. Prices for books and CDs differ by as much as 47% across Internet retailers at any one time and the dispersion of posted prices on the Internet is equal to or greater than comparable measures of dispersion across conventional retailers. Moreover, the Internet retailers with the lowest prices do not receive the most sales for either books or CDs. The observed dispersion is not easily explained as a response to existing models of search costs. However, price dispersion on the Internet may be explained by retailer heterogeneity with respect to factors such as branding and consumer "trust." We note that branding and trust may play an enhanced role on the Internet because of the spatial and temporal separation between buyer, seller, and product in Internet channels for books and CDs.

The ready-to-eat cereal industry is characterized by high concentration, high price-cost margins, large advertising-to-sales ratios, and numerous introductions of new products. Previous researchers have concluded that the ready-to-eat cereal industry is a classic example of an industry with nearly collusive pricing behavior and intense nonprice competition. This paper empirically examines this conclusion. In particular, I estimate price-cost margins, but more importantly I am able empirically to separate these margins into three sources: (i) that which is due to product differentiation; (ii) that which is due to multi-product firm pricing; and (iii) that due to potential price collusion. The results suggest that given the demand for different brands of cereal, the first two effects explain most of the observed price-cost margins. I conclude that prices in the industry are consistent with noncollusive pricing behavior, despite the high price-cost margins. Leading firms are able to maintain a portfolio of differentiated products and influence the perceived product quality. It is these two factors that lead to high price-cost margins.

/pdf/measuring-market-power-in-the-ready-to-eat-cereal-industry-1gg1mz66vx.pdf

Measuring Market Power in the Ready-to-Eat Cereal Industry

The ready-to-eat cereal industry is characterized by high concentration margins, large advertising to sales ratios, and numerous introductions of new products. Previous researchers have concluded that the ready-to-eat cereal industry is a classic example of an industry with nearly collusive pricing behavior and intense non-price competition. This paper empirically examines this conclusion. In particular, I estimate price-cost margins importantly I am able empirically to separate these margins into three parts: (1) that which is due to product differentiation; (2) that which is due to multi-product firm pricing; and (3) that due to potential price collusion. The results suggest that given the demand for different brands of cereal, the first two effects explain most of the observed price-cost markups. I conclude that prices in the industry are consistent with non-collusive pricing behavior to maintain a portfolio of differentiated products influence the perceived quality of these products, and it is these two factors that lead to high price-cost margins.

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/pdf/current-index-to-legal-periodicals-8re353ze53.pdf

Current index to legal periodicals

Price discrimination by imperfectly competitive firms may intensify competition, leading to lower prices for all consumers; the tradeoff of consumer groups' welfare that is characteristic of monopolistic discrimination need not arise. This escalation of competition may make firms worse off, and as a result firms may wish to avoid the discriminatory outcome. Under conditions similar to those in which unambiguous price and welfare effects may arise, unilateral commitments not to price discriminate - including the adoption of everyday low pricing or no-haggle policies - may raise firm profits by softening price competition.

https://www.jstor.org/stable/info/2555890

Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment

Conduct parameters and the measurement of market power

We argue that repeated interaction and high-powered formal contracts can be either substitutes or complements, depending on the relative impact of repeated interaction on incentive problems and contracting costs. In the offshore drilling industry, we find that oil and gas companies are less likely to choose fixed-price contracts as the frequency of their interaction with a driller increases. This supports the conclusion that repeated interaction and high-powered formal contracts are substitutes in this setting, indicating that repeated interaction reduces incentive problems more than contracting costs. In addition, we find that using instrumental variables to account for the endogenous matching of drillers to projects strengthens our results. Copyright 2004, Oxford University Press.

The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling

This paper investigates the scope of indirect network effects in the home video game industry. We argue that the increasing prevalence of non-exclusive software gives rise to indirect network effects that exist between users of competing and incompatible hardware platforms. This is because software non-exclusivity, like hardware compatibility, allows a software firm to sell to a market broader than a single platform's installed base, leading to a dependence of any particular platform's software on all firms' installed bases. We look for evidence of these market-wide network effects by estimating a model of hardware demand and software supply. Our software supply equation allows the supply of games for a particular platform to depend not only on the installed base of that platform, but also on the installed base of competing platforms. Our results indicate the presence of both a platform-specific network effect and - in recent years - a cross-platform (or generation-wide) network effect. Our finding that the scope of indirect network effects in this industry has widened suggests one reason that this market, which is often cited as a canonical example of one with strong indirect network effects, is no longer dominated by a single platform.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1029856_code1720.pdf?abstractid=1029856&mirid=1&type=2

Kenneth S. Corts

Papers

Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment

Conduct parameters and the measurement of market power

The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling

Software Exclusivity and the Scope of Indirect Network Effects in the U.S. Home Video Game Market

On the competitive effects of price-matching policies