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Internet Shopping Agents: Virtual Co-Location and Competition

  • Ganesh Iyer

    ()

    (Haas School of Business, University of California at Berkeley, Berkeley, California 94720-1900)

  • Amit Pazgal

    ()

    (John M.Olin School of Business, Washington University, St.Louis, Missouri 63130-4899)

Registered author(s):

    Internet Shopping Agents (ISAs) allow consumers to costlessly search many online retailers and buy at the lowest price. One would expect these ISAs to subject sellers to intense price competition that results in uniform low prices. Yet, Internet retailers have joined these ISAs. Furthermore, the prices charged by inside retailers can vary substantially. We examine the impact of ISAs on market competition. An ISA creates differentiation in the pricing strategies of ex-ante identical retailers: Some retailers join the ISA due to mass of consumers that they can potentially win, while others stay out and extract surplus from their loyal consumers, while others stay our and extract surplus from their loyal consumers. The equilibrium inside pricing is such that the average price charged can increase or decrease when more retailers join, depending on whether or not the reach of the ISA is independent of the number of joining retailers. When the reach is endogenous, there exist a unique number of inside retailers.

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    File URL: http://dx.doi.org/10.1287/mksc.22.1.85.12842
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    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 22 (2003)
    Issue (Month): 1 (November)
    Pages: 85-106

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    Handle: RePEc:inm:ormksc:v:22:y:2003:i:1:p:85-106
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    1. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
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    4. Dudey, Marc, 1990. "Competition by Choice: The Effect of Consumer Search on Firm Location Decisions," American Economic Review, American Economic Association, vol. 80(5), pages 1092-1104, December.
    5. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-49, October.
    6. Paul Klemperer, 1987. "The Competitiveness of Markets with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 138-150, Spring.
    7. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
    8. 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.
    9. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September.
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