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  • Moraga-Gonzalez, Jose L.

    ()
    (IESE Business School)

  • Wildenbeest, Matthijs R.

    (Indiana University)

Abstract

Web search technologies are fundamental tools for navigating the Internet. One particular type of search technology is "shopbots", or comparison sites. The emergence of Internet shopbots and their implications for price competition and market efficiency are the focus of this paper. We develop a simple model where a price comparison site tries to attract (possibly vertically and horizontally differentiated) online retailers, on the one hand, and consumers, on the other. Analysis of the model reveals that differentiation among the products of the retailers and their ability to price discriminate between on- and off-comparison-site consumers play a critical role. When products are homogeneous, if online retailers cannot charge different on- and off-the-comparison-site prices, then the comparison site has incentives to charge fees so high that some firms are excluded, which generates price dispersion and an inefficient outcome. By contrast, when on- and off-comparison-site prices can be different, the comparison site attracts all the players to the platform and the allocation is efficient. A similar result obtains when products are horizontally differentiated. In that case, the comparison site becomes an aggregator of product information and no matter whether firms can price discriminate or not, the comparison site attracts all the players to the platform and an efficient outcome ensues. We argue that the lack of vertical product differentiation may also be critical for this efficiency result. In fact, we show that when quality differences are large, the comparison site may find it profitable to charge fees that effectively exclude low quality producers, thereby inducing an inefficient outcome.

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Bibliographic Info

Paper provided by IESE Business School in its series IESE Research Papers with number D/933.

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Length: 33 pages
Date of creation: 09 Jul 2011
Date of revision:
Handle: RePEc:ebg:iesewp:d-0933

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Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/
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Related research

Keywords: shopbots; two-sided market; intermediation; price discrimination; product differentiation;

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References

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  1. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Andrea Galeotti & José Luis Moraga Gonzales, 2008. "Platform Intermediation in a Market for Differentiated Products," CESifo Working Paper Series 2266, CESifo Group Munich.
  3. Erik Brynjolfsson & Michael D. Smith, 2000. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Management Science, INFORMS, vol. 46(4), pages 563-585, April.
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  8. Paul Belleflamme & Eric Toulemonde, 2007. "Negative Intra-Group Externalities in Two-Sided Markets," CESifo Working Paper Series 2011, CESifo Group Munich.
  9. Michael Baye & John Morgan, 2005. "Brand and Price Advertising in Online Markets," Microeconomics 0504009, EconWPA.
  10. 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.
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  12. Spulber,Daniel F., 2009. "The Theory of the Firm," Cambridge Books, Cambridge University Press, number 9780521517386, October.
  13. Andrei Hagiu & Bruno Jullien, 2011. "Why do intermediaries divert search?," RAND Journal of Economics, RAND Corporation, vol. 42(2), pages 337-362, 06.
  14. Abdullah Yavaş, 1996. "Search and Trading in Intermediated Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 195-216, 06.
  15. Nocke, Volker & Peitz, Martin & Stahl, Konrad, 2004. "Platform Ownership," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 16, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  16. Yonghong An & Michael R. Baye & Yingyao Hu & John Morgan & Matt Shum, 2010. "Horizontal Mergers of Online Firms: Structural Estimation and Competitive Effects," Economics Working Paper Archive 564, The Johns Hopkins University,Department of Economics.
  17. Yongmin Chen & Chuan He, 2011. "Paid Placement: Advertising and Search on the Internet," Economic Journal, Royal Economic Society, vol. 121(556), pages F309-F328, November.
  18. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June.
  19. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  20. Yonghong An & Michael R Baye & Yingyao Hu & John Morgan & Matt Shum, 2010. "Identification and Estimation of Online Price Competition with an Unknown Number of Firms," Working Papers 2010-17, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy, revised Nov 2012.
  21. Yavas, Abdullah, 1994. "Middlemen in Bilateral Search Markets," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 406-29, July.
  22. Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Price Dispersion in the Small and in the Large: Evidence from an Internet Price Comparison Site," Working Papers 2004-03, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  23. Mark Armstrong & Julian Wright, 2007. "Two-sided Markets, Competitive Bottlenecks and Exclusive Contracts," Economic Theory, Springer, vol. 32(2), pages 353-380, August.
  24. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-72, September.
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Citations

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Cited by:
  1. Michael R. Baye & Babur De los Santos & Matthijs R. Wildenbeest, 2013. "Searching for Physical and Digital Media: The Evolution of Platforms for Finding Books," NBER Working Papers 19519, National Bureau of Economic Research, Inc.
  2. Makoto Watanabe, 2012. "Middlemen: A Directed Search Equilibrium Approach," Tinbergen Institute Discussion Papers 12-138/V, Tinbergen Institute.

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