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Implications of Reduced Search Cost and Free Riding in E-Commerce

Author

Listed:
  • Dazhong Wu

    (Center for Research in Electronic Commerce, Department of Management Science and Information Systems, The McCombs School of Business, University of Texas, Austin, Texas 78712)

  • Gautam Ray

    (Center for Research in Electronic Commerce, Department of Management Science and Information Systems, The McCombs School of Business, University of Texas, Austin, Texas 78712)

  • Xianjun Geng

    (Center for Research in Electronic Commerce, Department of Management Science and Information Systems, The McCombs School of Business, University of Texas, Austin, Texas 78712)

  • Andrew Whinston

    (Center for Research in Electronic Commerce, Department of Management Science and Information Systems, The McCombs School of Business, University of Texas, Austin, Texas 78712)

Abstract

This paper examines a market where the provision of information service is costly, but information service has the characteristics of a public good. Consumers, on the other hand, can use the information service to make an informed purchase decision and derive higher utility from consuming their ideal product. However, after receiving the information service from an information service provider, consumers can easily free ride by purchasing at low-price sellers who do not provide any information service. The paper examines the competition where sellers compete by providing information service for horizontally differentiated products and where technology reduces consumers' search cost. It is found that in this market a seller needs to establish itself as an information service provider in order to make positive profits, even when there is free riding. A seller, however, cannot make positive profits by free riding all the time. Also, with an increase in competition in the information service market, sellers have reduced incentives to provide information service. It is also found that in this market a decrease in search cost may increase or decrease social welfare.

Suggested Citation

  • Dazhong Wu & Gautam Ray & Xianjun Geng & Andrew Whinston, 2004. "Implications of Reduced Search Cost and Free Riding in E-Commerce," Marketing Science, INFORMS, vol. 23(2), pages 255-262, November.
    • Handle: RePEc:inm:ormksc:v:23:y:2004:i:2:p:255-262
    DOI: 10.1287/mksc.1040.0047
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    References listed on IDEAS

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