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Free Riding and Sales Strategies for the Internet

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Author Info
Dennis W. Carlton
Judith A. Chevalier

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Abstract

We examine manufacturers' decisions of whether and how to offer their products for sale over the internet. Manufacturers that rely on promotion of their products by brick and mortar retailers must consider the possibility that internet retailers can free ride off of that promotional effort. This creates an incentive for manufacturers to limit the availability of their products over the internet and to control the pricing of their products over the internet. We examine three categories of products: fragrances, DVD players, and side by side refrigerators. Our evidence suggests that manufacturers that limit distribution in the physical world also use various mechanisms to limit distribution online. In particular, we find evidence that these manufacturers attempt to prevent the sale of their products by online retailers who sell goods at deep discounts. Furthermore, we show that manufacturers who distribute their goods directly through manufacturer websites tend to charge very high prices for the products, consistent with the hypothesis that manufacturers internalize free rider issues. While our main focus is on free riding, our evidence on pricing practices is germane to the growing literature on price dispersion on the internet.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8067.

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Date of creation: Jan 2001
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Handle: RePEc:nbr:nberwo:8067

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Find related papers by JEL classification:
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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  1. Randy A. Nelson & Richard Cohen & Frederik Roy Rasmussen, 2007. "An Analysis of Pricing Strategy and Price Dispersion on the Internet," Eastern Economic Journal, Eastern Economic Association, vol. 33(1), pages 95-110, Winter. [Downloadable!]
  2. 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!]
  3. Austan Goolsbee & Judith Chevalier, 2002. "Measuring Prices and Price Competition Online: Amazon and Barnes and Noble," NBER Working Papers 9085, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Peter Kuhn & Mikal Skuterud Skuterud, 2002. "Internet Job Search and Unemployment Durations," University of California at Santa Barbara, Economics Working Paper Series 20-02, Department of Economics, UC Santa Barbara. [Downloadable!]
    Other versions:
  5. Chris Forman & Avi Goldfarb & Shane Greenstein, 2002. "Digital Dispersion: An Industrial and Geographic Census of Commerical Internet Use," NBER Working Papers 9287, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Eiichiro Kazumori & John McMillan, 2003. "Selliing Online Versus Offline," Levine's Bibliography 506439000000000254, UCLA Department of Economics. [Downloadable!]
  7. Fiona Scott Morton & Florian Zettelmeyer & Jorge Silva Risso, 2000. "Internet Car Retailing," NBER Working Papers 7961, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Emin M. Dinlersoz & Rubén Hernández-Murillo, 2005. "The diffusion of electronic business in the United States," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 11-34. [Downloadable!]
  9. Friberg, Richard & Ganslandt, Mattias & Sandström, Mikael, 2001. "Pricing Strategies in E-Commerce: Bricks vs. Clicks," Working Paper Series 559, Research Institute of Industrial Economics. [Downloadable!]
    Other versions:
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