When Shopbots Meet Emails: Implications for Price Competition on the Internet

The Internet has dramatically reduced search costs for customers by using such technologies as shopbots. Email based targeting is relatively inexpensive; the targeting itself can be more precise because firms can better track individual purchase behavior on the Internet. In this paper we address the question: How does the convergence of low search cost for consumers and better targeting ability for firms affect price competition on the Internet? Current theoretical research suggests that both (1) lower search costs and (2) better targeting ability generally lead to more intense price competition. Taken individually, these results would lead us to expect that there will be greater price competition on the Internet due to lower search costs and better targeting. In this paper, we argue that targeting ability increases as search costs fall. Falling search costs can lead to improvements in targeting ability in the form of greater "targeting reach" (the ability to individually address consumers) and "precision" (the ability to distinguish consumers on the basis of their loyalty). We show that the interaction between consumer search and targeting ability can reduce the intensity of competition and raise prices as consumer search and targeting become easier on the Internet.