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

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  • Simon Latcovich
  • Howard 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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Bibliographic Info

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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Cited by:
  1. Canoy, M.F.M. & Ours, J.C. van & Ploeg, F. van der, 2005. "The Economics of Books," Discussion Paper 2005-13, Tilburg University, Center for Economic Research.
  2. 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, Western Economic Association International, vol. 44(2), pages 265-279, April.
  3. Arup Daripa & Sandeep Kapur, 2003. "Pricing on the Internet," Microeconomics 0312007, EconWPA.
  4. Maris Goldmanis & Ali Hortaçsu & Chad Syverson & �nsel Emre, 2010. "E-Commerce and the Market Structure of Retail Industries," Economic Journal, Royal Economic Society, vol. 120(545), pages 651-682, 06.
  5. Ralph Breuer & Malte Brettel & Andreas Engelen, 2011. "Incorporating long-term effects in determining the effectiveness of different types of online advertising," Marketing Letters, Springer, vol. 22(4), pages 327-340, November.
  6. 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.

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