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The Impact of E-Commerce on Competition in the Retail Brokerage Industry

Author

Listed:
  • Yannis Bakos

    (Leonard N. Stern School of Business, New York University, 44 West 4th Street, Room 8-83, New York, New York 10012-1126)

  • Henry C. Lucas

    (Robert H. Smith School of Business, 4337 Van Munching Hall, University of Maryland, College Park, Maryland 20742-1815)

  • Wonseok Oh

    (Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montreal, Quebec, H3A 1G5 Canada)

  • Gary Simon

    (Leonard N. Stern School of Business, New York University, 44 West 4th Street, New York, New York 10012-1126)

  • Siva Viswanathan

    (Robert H. Smith School of Business, 4313 Van Munching Hall, University of Maryland, College Park, Maryland 20742-1815)

  • Bruce W. Weber

    (London Business School, Regent’s Park, London, NW1 4SA United Kingdom)

Abstract

This paper analyzes the impact of e-commerce on markets where established firms face competition from Internet-based entrants with focused offerings. In particular, we study the retail brokerage sector where the growth of online brokerages and the availability of alternate sources of information and research services have challenged the dominance of traditional brokerages. We develop a stylized game-theoretic model to analyze the impact of competition between an incumbent full-service brokerage firm with a bundled offering of research services and trade execution and an online entrant offering just trade execution. We find that as consumers’ willingness to pay for research declines, the incumbent finds it optimal to unbundle its offering when competing with the online entrant. We also find that the online entrant chooses a lower quality of trade execution when faced with direct competition from the incumbent’s unbundled offering. The analytical model motivates a unique field experiment placing actual simultaneous trades with traditional full-service and online brokers, to compare order handling practices and the quality of trade execution. In keeping with our analytical results, our empirical findings show a significant difference in the quality of execution between online brokerages and their full-service counterparts. We discuss the relevance of our findings for quality differentiation, price convergence, and profit decline in a variety of markets where traditional incumbents are faced with changes in the competitive landscape as a result of e-commerce.

Suggested Citation

  • Yannis Bakos & Henry C. Lucas & Wonseok Oh & Gary Simon & Siva Viswanathan & Bruce W. Weber, 2005. "The Impact of E-Commerce on Competition in the Retail Brokerage Industry," Information Systems Research, INFORMS, vol. 16(4), pages 352-371, December.
    • Handle: RePEc:inm:orisre:v:16:y:2005:i:4:p:352-371
    DOI: 10.1287/isre.1050.0064
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    References listed on IDEAS

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    1. Paolo Calvosa, 2021. "The Influence of E-Commerce in Changing Competition in Regulated Industries: An Analysis in the Italian Sports Betting Market," International Journal of Business and Management, Canadian Center of Science and Education, vol. 13(12), pages 306-306, July.
    2. Delphine Irac & Claire Célérier & Philippe Askenazy, 2010. "Vente à distance, internet et dynamiques des prix," Économie et Prévision, Programme National Persée, vol. 194(3), pages 1-13.
    3. Cimon, David A., 2021. "Broker routing decisions in limit order markets," Journal of Financial Markets, Elsevier, vol. 54(C).
    4. Niemand, Thomas & Rigtering, J.P. Coen & Kallmünzer, Andreas & Kraus, Sascha & Maalaoui, Adnane, 2021. "Digitalization in the financial industry: A contingency approach of entrepreneurial orientation and strategic vision on digitalization," European Management Journal, Elsevier, vol. 39(3), pages 317-326.
    5. Tobias Kranz & Florian Teschner & Christof Weinhardt, 2015. "Beware of Performance Indicators," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 57(6), pages 349-361, December.
    6. Ritwik Raj & Mark H. Karwan & Chase Murray & Lei Sun, 2022. "Itemized pricing in B2B bundles with diminishing reservation prices and loss averse customers," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 21(4), pages 375-392, August.
    7. Animesh Animesh & Vandana Ramachandran & Siva Viswanathan, 2010. "Research Note ---Quality Uncertainty and the Performance of Online Sponsored Search Markets: An Empirical Investigation," Information Systems Research, INFORMS, vol. 21(1), pages 190-201, March.
    8. Animesh Animesh & Siva Viswanathan & Ritu Agarwal, 2011. "Competing “Creatively” in Sponsored Search Markets: The Effect of Rank, Differentiation Strategy, and Competition on Performance," Information Systems Research, INFORMS, vol. 22(1), pages 153-169, March.
    9. Chang-Gyu Yang & Silvana Trimi & Sang-Gun Lee & Joon-Sun Yang, 2017. "A Survival Analysis of Business Insolvency in ICT and Automobile Industries," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 16(06), pages 1523-1548, November.
    10. Vamosiu, Adriana, 2018. "Compatibility and bundling of stand and No stand-alone use complements," International Journal of Production Economics, Elsevier, vol. 201(C), pages 62-74.

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