IDEAS home Printed from https://ideas.repec.org/p/oxf/wpaper/9936.html
   My bibliography  Save this paper

Sinking the Internet: Pricing, Sunk Costs, and Market Structure Online

Author

Listed:
  • Latcovich, S.
  • Smith, H.

Abstract

This paper evaluates alternative strategic models of competition and market structure in online retailing, and makes comparisons with traditional retailing. Online consumers are less concerned than traditional consumers about spatial characteristics and more concerned about hidden quality characteristics. Online retailers rely more on advertising than traditional retailers do, to inform consumers and to signal hidden quality attributes. Price competition may be imperfect, because of vertical product differentiation, incomplete consumer awareness, and perfect information exchange between retailers. Advertising and revenue data for the online book market reveal that consumers respond to advertising rather than low prices. As the market increases, advertising costs escalate and there is no new entry. Advertising to sales ratios and market concentration ratios are much higher than for traditional retailers. Using price and demand information for individual books over a number of weeks, we find counter-cyclical and cross-sectional price variation inconsistent with perfect price competition.

Suggested Citation

  • Latcovich, S. & Smith, H., 2000. "Sinking the Internet: Pricing, Sunk Costs, and Market Structure Online," Economics Series Working Papers 9936, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:9936
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bliss, Christopher, 1988. "A Theory of Retail Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 375-391, June.
    2. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    3. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    4. Joel Sobel, 1984. "The Timing of Sales," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 353-368.
    5. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 3-13.
    6. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
    7. Klemperer, Paul D, 1987. "Entry Deterrence in Markets with Consumer Switching Costs," Economic Journal, Royal Economic Society, vol. 97(388a), pages 99-117, Supplemen.
    8. Steven Salop & Joseph Stiglitz, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 493-510.
    9. Gene M. Grossman & Carl Shapiro, 1984. "Informative Advertising with Differentiated Products," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(1), pages 63-81.
    10. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 375-394.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, September.
    2. Heiman, Amir & Ofir, Chezy, 2010. "The effects of imbalanced competition on demonstration strategies," International Journal of Research in Marketing, Elsevier, vol. 27(2), pages 175-187.
    3. Castanheira, Micael & Ornaghi, Carmine & Siotis, Georges, 2019. "The unexpected consequences of generic entry," Journal of Health Economics, Elsevier, vol. 68(C).
    4. Etro, Federico, 2016. "Research in economics and industrial organization," Research in Economics, Elsevier, vol. 70(4), pages 511-517.
    5. Jean-Bernard Chatelain, 1999. "Taux de marge et structure financière," Annals of Economics and Statistics, GENES, issue 53, pages 127-147.
    6. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 34, pages 2221-2299, Elsevier.
    7. Ioana A. Duca & José M. Montero & Marianna Riggi & Roberta Zizza, 2017. "I will survive. Pricing strategies of financially distressed firms," Temi di discussione (Economic working papers) 1106, Bank of Italy, Economic Research and International Relations Area.
    8. Wipo, 2013. "World Intellectual Property Report 2013 - Brands: Reputation and Image in the Global Marketplace," WIPO Economics & Statistics Series, World Intellectual Property Organization - Economics and Statistics Division, number 2013:944, April.
    9. Mazali, Rogério & Rodrigues-Neto, José A., 2013. "Dress to impress: Brands as status symbols," Games and Economic Behavior, Elsevier, vol. 82(C), pages 103-131.
    10. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    11. Bagwell, Kyle & Ramey, Garey, 1993. "Advertising as Information: Matching Products to Buyers," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(2), pages 199-243, Summer.
    12. Khanna, Naveen & Tice, Sheri, 2005. "Pricing, exit, and location decisions of firms: Evidence on the role of debt and operating efficiency," Journal of Financial Economics, Elsevier, vol. 75(2), pages 397-427, February.
    13. Grunewald, Andreas & Kräkel, Matthias, 2017. "Advertising as signal jamming," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 91-113.
    14. Anderson, Simon P. & Gabszewicz, Jean J., 2006. "The Media and Advertising: A Tale of Two-Sided Markets," Handbook of the Economics of Art and Culture, in: V.A. Ginsburgh & D. Throsby (ed.), Handbook of the Economics of Art and Culture, edition 1, volume 1, chapter 18, pages 567-614, Elsevier.
    15. Xuying Zhao & Hong Guo & Gangshu Cai & Subhajyoti Bandyopadhyay, 2021. "The Role of Expectation–Reality Discrepancy in Service Contracts," Production and Operations Management, Production and Operations Management Society, vol. 30(11), pages 4160-4175, November.
    16. Jianqiang Zhang & Zhuping Liu & Raghunath Singh Rao, 2018. "Flirting with the enemy: online competitor referral and entry-deterrence," Quantitative Marketing and Economics (QME), Springer, vol. 16(2), pages 209-249, June.
    17. Szech, Nora & Weinschenk, Philipp, 2013. "Rebates in a Bertrand game," Journal of Mathematical Economics, Elsevier, vol. 49(2), pages 124-133.
    18. Gabrielsen, Tommy Staahl & Sorgard, Lars, 2007. "Private labels, price rivalry, and public policy," European Economic Review, Elsevier, vol. 51(2), pages 403-424, February.
    19. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135, Elsevier.
    20. Francesco Nava & Pasquale Schiraldi, 2014. "Sales And Collusion In A Market With Storage," Journal of the European Economic Association, European Economic Association, vol. 12(3), pages 791-832, June.

    More about this item

    Keywords

    PRICES ; COSTS ; INTERNET ; MARKET;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:9936. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anne Pouliquen (email available below). General contact details of provider: https://edirc.repec.org/data/sfeixuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.