Pricing, Sunk Costs, and Market Structure Online: Evidence from

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Pricing, Sunk Costs, and Market Structure Online: Evidence from

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Simon Latcovich
Howard Smith

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Howard William Smith

Abstract

While online consumers are less concerned than traditional consumers about firm location, they may be more concerned about unobservable quality and, to signal this, online retailers rely more on advertising than traditional retailers. Imperfect price competition may arise because of vertical product differentiation, incomplete consumer awareness, and near-perfect information exchange between retailers. This paper evaluates alternative theories of competition and market structure in online retailing. Advertising, product development, and revenue data for the online book market reveal that consumers respond to advertising and website spending rather than low prices. As the market size expanded, during 1997--2001, these endogenous sunk costs escalated and there was no major new entry. Advertising-to-sales ratios and market-concentration ratios are much higher than for traditional bookselling. 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. Copyright 2001, Oxford University Press.

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Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

Volume (Year): 17 (2001)
Issue (Month): 2 (Summer)
Pages: 217-234
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Handle: RePEc:oup:oxford:v:17:y:2001:i:2:p:217-234

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Maris Goldmanis & Ali Hortacsu & Chad Syverson & Onsel Emre, 2008. "E-commerce and the Market Structure of Retail Industries," NBER Working Papers 14166, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Onsel Emre & Ali Hortacsu & Chad Syverson, 2005. "E-commerce and the Market Structure of Retail Industries," Working Papers 05-24, NET Institute, revised Oct 2005. [Downloadable!]
Canoy, Marcel & van der Ploeg, Frederick & van Ours, Jan C, 2005. "The Economics of Books," CEPR Discussion Papers 4892, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Other versions:
- Marcel F. M. Canoy & Jan C. van Ours & Frederick van der Ploeg, 2005. "The Economics of Books," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
- Canoy, Marcel & Ours, Jan C. van & Ploeg, Frederick van der, 2005. "The economics of books," Discussion Paper 13, Tilburg University, Center for Economic Research. [Downloadable!]
- Canoy, Marcel & van Ours, Jan C. & van der Ploeg, Frederick, 2006. "The Economics of Books," Handbook of the Economics of Art and Culture, Elsevier. [Downloadable!] (restricted)
Michael R. Baye & J. Rupert J. Gatti & Paul Kattuman & John Morgan, 2005. "Did the Euro Foster Online Price Competition? Evidence from an International Price Comparison Site," Working Papers 2005-09, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
Other versions:
- Michael R. Baye & J. Rupert J. Gatti & Paul Kattuman & John Morgan, 2006. "Did the Euro Foster Online Price Competition? Evidence from an International Price Comparison Site," Economic Inquiry, Oxford University Press, vol. 44(2), pages 265-279, April. [Downloadable!] (restricted)
Emin M. Dinlersoz & Rubén Hernández-Murillo, 2004. "The diffusion of electronic business in the U.S," Working Papers 2004-009, Federal Reserve Bank of St. Louis. [Downloadable!]
Arup Daripa & Sandeep Kapur, 2003. "Pricing on the Internet," Microeconomics 0312007, EconWPA. [Downloadable!]
Other versions:
- Arup Daripa & Sandeep Kapur, 2001. "Pricing on the Internet," Oxford Review of Economic Policy, Oxford University Press, vol. 17(2), pages 202-216, Summer.

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