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Internet Shopping Agents: Virtual Co-Location and Competition

Author

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  • Ganesh Iyer

    (Haas School of Business, University of California at Berkeley, Berkeley, California 94720-1900)

  • Amit Pazgal

    (John M.Olin School of Business, Washington University, St.Louis, Missouri 63130-4899)

Abstract

Internet Shopping Agents (ISAs) allow consumers to costlessly search many online retailers and buy at the lowest price. One would expect these ISAs to subject sellers to intense price competition that results in uniform low prices. Yet, Internet retailers have joined these ISAs. Furthermore, the prices charged by inside retailers can vary substantially. We examine the impact of ISAs on market competition. An ISA creates differentiation in the pricing strategies of ex-ante identical retailers: Some retailers join the ISA due to mass of consumers that they can potentially win, while others stay out and extract surplus from their loyal consumers, while others stay our and extract surplus from their loyal consumers. The equilibrium inside pricing is such that the average price charged can increase or decrease when more retailers join, depending on whether or not the reach of the ISA is independent of the number of joining retailers. When the reach is endogenous, there exist a unique number of inside retailers.

Suggested Citation

  • Ganesh Iyer & Amit Pazgal, 2003. "Internet Shopping Agents: Virtual Co-Location and Competition," Marketing Science, INFORMS, vol. 22(1), pages 85-106, November.
    • Handle: RePEc:inm:ormksc:v:22:y:2003:i:1:p:85-106
    DOI: 10.1287/mksc.22.1.85.12842
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    References listed on IDEAS

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