Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Study challenges claim that the Internet promotes price competition

16.03.2005


Researchers have developed an analytical model that explains why the internet may actually be bad for consumers in some cases.



Many experts had argued that the internet will be a boon to consumers, forcing businesses to compete more aggressively on prices as customers effortlessly compare prices on the web.

There’s just one problem: actual empirical studies have shown mixed results, with prices on the web sometimes no better than brick-and-mortar competitors. “We’re challenging the conventional wisdom and showing that making it easier for consumers to compare prices on the web may actually result in higher prices and reduced consumer welfare,” said Waleed Muhanna, co-author of the study and associate professor of management information systems at Ohio State University’s Fisher College of Business.


He conducted the study with Colin Campbell of Rutgers University and Gautam Ray of the University of Texas at Austin. Their results appear in the March 2005 issue of the journal Management Science.

While the researchers used a complex game-theoretic analysis to reach their conclusions, the reasoning behind why the internet may hurt consumers is relatively simple, Muhanna said. The same web technology that allows consumers to compare prices on a product from several different businesses also allow these businesses to check easily on their competitors.

That means businesses cannot reduce their prices without competitors finding out quickly and possibly matching or beating those prices. The result is that businesses selling on the web have no incentive to undercut their rivals, he said. “If I know you can nearly instantly detect my attempt to undercut your prices, and that you will match or beat the new price almost immediately, there is a lot to lose,” Muhanna said. “It could trigger a price war that would hurt us both. “The incentives are such that businesses keep prices higher than they would otherwise be if they weren’t able to easily monitor each other’s actions.”

Contrast this situation with how businesses made pricing decisions in the pre-internet days.

If sales of a product went down, a business couldn’t easily determine if it was because competitors were beating their price, or there was some other reason for a decline in demand. In this situation, a business may decide the best choice would be to cut prices to boost demand for their product. A business could be reasonably sure that its competitors would not easily find the new price, allowing it a window of opportunity in which the company could have an advantage in the marketplace.

Now, however, the prices of competitors are “essentially one click away” on the internet, Muhanna said, reducing the potential gains from undercutting rivals.

In effect, competitors are involved in a “tacit collusion” to keep prices stable, he said. That means they don’t coordinate with each other or even agree with each other to prop up prices – but the effect is the same as if they did.

“It is as if they had gotten together to coordinate prices, but each is acting independently in their own self interest. They are agreeing to maintain a cartel-like pricing arrangement without explicitly coordinating.”

This presents major difficulties for federal and state authorities who enforce anti-trust laws, because it would be nearly impossible to prove collusion in cases like this, Muhanna said. Furthermore, even if there was some way to prove collusion, it’s not clear what steps government officials could take to remedy the situation, short of keeping businesses from posting their prices on the internet.

The end result is that consumers may not get the price benefits from internet shopping that many experts expected, Muhanna said.
While consumers may benefit from buying some goods online, Muhanna said the results suggest that overall, people shouldn’t expect huge savings from buying on the web, and in some cases consumer welfare may actually suffer.

Now that their model shows how internet shopping may hurt consumers, Muhanna said he and his colleagues are collecting data to see if they can find evidence consistent with their findings in the real world. They are trying to determine if prices on the web are trending higher over time, and if there is evidence that businesses are actively monitoring their competitors’ prices on the web.

Why have so many experts predicted the web will benefit consumers?

One reason is because they used a standard “static” economic model in which companies compete over a set period of time. But this is not how things happen in the real world, he said.

Muhanna and his colleagues used a dynamic model, more faithful to the real economy, in which companies compete over an unlimited period of time. When companies know they are going to be competing tomorrow and next year, their decisions are different than if you assume – like a static model does – that the competition will end at some set time.

“We think the model we used is more realistic and will deliver results that are more faithful to reality,” he said.

Waleed Muhanna | EurekAlert!
Further information:
http://www.osu.edu

More articles from Studies and Analyses:

nachricht Multi-year study finds 'hotspots' of ammonia over world's major agricultural areas
17.03.2017 | University of Maryland

nachricht Diabetes Drug May Improve Bone Fat-induced Defects of Fracture Healing
17.03.2017 | Deutsches Institut für Ernährungsforschung Potsdam-Rehbrücke

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: A Challenging European Research Project to Develop New Tiny Microscopes

The Institute of Semiconductor Technology and the Institute of Physical and Theoretical Chemistry, both members of the Laboratory for Emerging Nanometrology (LENA), at Technische Universität Braunschweig are partners in a new European research project entitled ChipScope, which aims to develop a completely new and extremely small optical microscope capable of observing the interior of living cells in real time. A consortium of 7 partners from 5 countries will tackle this issue with very ambitious objectives during a four-year research program.

To demonstrate the usefulness of this new scientific tool, at the end of the project the developed chip-sized microscope will be used to observe in real-time...

Im Focus: Giant Magnetic Fields in the Universe

Astronomers from Bonn and Tautenburg in Thuringia (Germany) used the 100-m radio telescope at Effelsberg to observe several galaxy clusters. At the edges of these large accumulations of dark matter, stellar systems (galaxies), hot gas, and charged particles, they found magnetic fields that are exceptionally ordered over distances of many million light years. This makes them the most extended magnetic fields in the universe known so far.

The results will be published on March 22 in the journal „Astronomy & Astrophysics“.

Galaxy clusters are the largest gravitationally bound structures in the universe. With a typical extent of about 10 million light years, i.e. 100 times the...

Im Focus: Tracing down linear ubiquitination

Researchers at the Goethe University Frankfurt, together with partners from the University of Tübingen in Germany and Queen Mary University as well as Francis Crick Institute from London (UK) have developed a novel technology to decipher the secret ubiquitin code.

Ubiquitin is a small protein that can be linked to other cellular proteins, thereby controlling and modulating their functions. The attachment occurs in many...

Im Focus: Perovskite edges can be tuned for optoelectronic performance

Layered 2D material improves efficiency for solar cells and LEDs

In the eternal search for next generation high-efficiency solar cells and LEDs, scientists at Los Alamos National Laboratory and their partners are creating...

Im Focus: Polymer-coated silicon nanosheets as alternative to graphene: A perfect team for nanoelectronics

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are less stable. Now researchers at the Technical University of Munich (TUM) have, for the first time ever, produced a composite material combining silicon nanosheets and a polymer that is both UV-resistant and easy to process. This brings the scientists a significant step closer to industrial applications like flexible displays and photosensors.

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

International Land Use Symposium ILUS 2017: Call for Abstracts and Registration open

20.03.2017 | Event News

CONNECT 2017: International congress on connective tissue

14.03.2017 | Event News

ICTM Conference: Turbine Construction between Big Data and Additive Manufacturing

07.03.2017 | Event News

 
Latest News

Researchers shoot for success with simulations of laser pulse-material interactions

29.03.2017 | Materials Sciences

Igniting a solar flare in the corona with lower-atmosphere kindling

29.03.2017 | Physics and Astronomy

As sea level rises, much of Honolulu and Waikiki vulnerable to groundwater inundation

29.03.2017 | Earth Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>