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Measuring the Frictional Costs of Online Transactions: The Case of a Name-Your-Own-Price Channel

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Author Info

  • Il-Horn Hann

    ()
    (Marshall School of Business, University of Southern California, Los Angeles, California 90025)

  • Christian Terwiesch

    ()
    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

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    Abstract

    We study the offers submitted by consumers to a large Name-Your-Own-Price (NYOP) online retailer. A distinctive feature of this retailer is that it allows consumers to repeatedly submit offers on one and the same product. While consumers could identify the threshold price (the minimum price for which the retailer is willing to sell) by incrementing their offer in small steps in each consecutive round, such a strategy would require them to go through many additional online transactions. We define frictional cost as the disutility that the consumer experiences when conducting an online transaction, such as submitting an offer. Thus, in our setting, consumers trade off a direct financial value (lower price) for frictional costs. Based on a consumer choice model capturing this trade-off, we use the observed consumer behavior to reconstruct the frictional cost parameters for the consumers in our sample. We show that, perhaps contrary to the general wisdom, frictional costs in electronic markets are substantial, with median values ranging from EUR 3.54 for a portable digital music player (MP3) to EUR 6.08 for a personal digital assistant (PDA). We find that consumers who have gathered experience with the NYOP channel in previous transactions exhibit lower frictional costs than consumers who use the channel for the first time. Surprisingly, sociodemographic variables do not help to explain the variation in frictional costs.

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    File URL: http://dx.doi.org/10.1287/mnsc.49.11.1563.20586
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 49 (2003)
    Issue (Month): 11 (November)
    Pages: 1563-1579

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    Handle: RePEc:inm:ormnsc:v:49:y:2003:i:11:p:1563-1579

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    Related research

    Keywords: Electronic Markets; Frictional Costs; Name-Your-Own-Price Channel; Online Haggling; Price Dispersion;

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    Cited by:
    1. Andrea Pozzi, 2012. "Shopping Cost and Brand Exploration in Online Grocery," American Economic Journal: Microeconomics, American Economic Association, vol. 4(3), pages 96-120, August.
    2. Brett Danaher & Michael D. Smith & Rahul Telang, 2013. "Piracy and Copyright Enforcement Mechanisms," NBER Working Papers 19150, National Bureau of Economic Research, Inc.
    3. Huang, Ching-I & Chen, Jong-Rong & Lee, Chiu-Yu, 2013. "Buyer behavior under the Best Offer mechanism: A theoretical model and empirical evidence from eBay Motors," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 11-33.
    4. Bhargava, Hemant K. & Sun, Daewon, 2008. "Pricing under quality of service uncertainty: Market segmentation via statistical QoS guarantees," European Journal of Operational Research, Elsevier, vol. 191(3), pages 1189-1204, December.
    5. Yang, Yu, 2011. "Frictionless economy and its implementation in real world," MPRA Paper 34345, University Library of Munich, Germany.
    6. Anderson, Chris K. & Xie, Xiaoqing, 2014. "Pricing and market segmentation using opaque selling mechanisms," European Journal of Operational Research, Elsevier, vol. 233(1), pages 263-272.
    7. Anindya Ghose & Bin Gu, 2006. "Search Costs, Demand Structure and Long Tail in Electronic Markets: Theory and Evidence," Working Papers 06-19, NET Institute, revised Oct 2006.
    8. Dmitry Shapiro & Xianwen Shi, 2008. "Market Segmentation: The Role of Opaque Travel Agencies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(4), pages 803-837, December.
    9. Oliver Hinz & Jochen Eckert, 2010. "The Impact of Search and Recommendation Systems on Sales in Electronic Commerce," Business & Information Systems Engineering, Springer, vol. 2(2), pages 67-77, April.
    10. Shor, Mikhael & Oliver, Richard L., 2006. "Price discrimination through online couponing: Impact on likelihood of purchase and profitability," Journal of Economic Psychology, Elsevier, vol. 27(3), pages 423-440, June.

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