The effect of stock market dynamics on Internet price competition.pdf

The Effect of Stock Market Dynamics on Internet Price Competition Yong Cao University of Alaska Thomas S. Gruca University of Iowa, Iowa City 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 determi- nants 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 substan- tially lower prices than hybrid e-tailers. The 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 competi- tion among Internet retailers in a single category. Keywords: pricing; Internet; e-commerce; business mod- els; financial markets What drives pricing competition on the Internet? Ac- cording to many, information is the key driver of e-tailer pricing. Comparative pricing data are widely available to shoppers from sites such as or . Consequently, customers can quickly locate the lowest prices available on the Internet. At the same time, e-tailers can easily change their prices in response to consumer de- mand or competitors’ moves, which they can monitor with little effort. Sinha (2000) suggested that the availability of price information to customers and competitors should drive prices down and quickly narrow any gap between e- tailers’ prices. Although there is a great deal of speculative and norma- tive writing on Internet pricing, there are only a handful of empirical