Red Queen Pricing Effects in E-Retail Markets
A standard “solution” offered to the deleterious effects of all-out price competition is for firms to engage in differentiation strategies. This solution, however, depends critically on the inability of rivals to imitate a successful differentiation strategy. With imitation, we show how “Red Queen” pricing effects can arise: All firms have an incentive to vertically differentiate and increase markups, yet imitation by rivals drives prices down toward pre-differentiation levels. Thus, the price premia arising from differentiation strategies in eretailing critically depend on the number of other firms that imitate the strategies. Based on data from Shopper.com, we find that an online firm that unilaterally differentiates itself from its rivals by participating in CNet’s Certified Merchant program enjoys a 5 to 17 percent price premium. However, when other firms also follow this strategy, the price premium vanishes.
|Date of creation:||2005|
|Date of revision:|
|Contact details of provider:|| Postal: 1309 East Tenth Street, Room 451, Bloomington, IN 47405-1701|
Web page: http://kelley.iu.edu/bepp/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John G. Lynch , Jr. & Dan Ariely, 2000. "Wine Online: Search Costs Affect Competition on Price, Quality, and Distribution," Marketing Science, INFORMS, vol. 19(1), pages 83-103, April.
- Rajiv Lal & Miklos Sarvary, 1999. "When and How Is the Internet Likely to Decrease Price Competition?," Marketing Science, INFORMS, vol. 18(4), pages 485-503.
- Smith, Michael D & Brynjolfsson, Erik, 2001.
"Consumer Decision-Making at an Internet Shopbot: Brand Still Matters,"
Journal of Industrial Economics,
Wiley Blackwell, vol. 49(4), pages 541-58, December.
- Michael D. Smith & Erik Brynjolfsson, 2001. "Consumer Decision-making at an Internet Shopbot: Brand Still Matters," NBER Chapters, in: E-commerce, pages 541-558 National Bureau of Economic Research, Inc.
- 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.
- Baylis, Kathy & Perloff, Jeffrey M., 2001.
"Price Dispersion on the Internet: Good Firms and Bad Firms,"
Institute for Research on Labor and Employment, Working Paper Series
qt2t0770rn, Institute of Industrial Relations, UC Berkeley.
- Kathy Baylis & Jeffrey Perloff, 2002. "Price Dispersion on the Internet: Good Firms and Bad Firms," Review of Industrial Organization, Springer, vol. 21(3), pages 305-324, November.
- Glenn Ellison & Sara Fisher Ellison, 2009.
"Search, Obfuscation, and Price Elasticities on the Internet,"
Econometric Society, vol. 77(2), pages 427-452, 03.
- Glenn Ellison & Sara Fisher Ellison, 2004. "Search, Obfuscation, and Price Elasticities on the Internet," NBER Working Papers 10570, National Bureau of Economic Research, Inc.
- Clay, Karen, et al, 2002. "Retail Strategies on the Web: Price and Non-price Competition in the Online Book Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 351-67, September.
- Eric K. Clemons & Il-Horn Hann & Lorin M. Hitt, 2002. "Price Dispersion and Differentiation in Online Travel: An Empirical Investigation," Management Science, INFORMS, vol. 48(4), pages 534-549, April.
- Gary E. Bolton & Elena Katok & Axel Ockenfels, 2003.
"How Effective are Electronic Reputation Mechanisms? An Experimental Investigation,"
Working Paper Series in Economics
3, University of Cologne, Department of Economics.
- Gary E. Bolton & Elena Katok & Axel Ockenfels, 2004. "How Effective Are Electronic Reputation Mechanisms? An Experimental Investigation," Management Science, INFORMS, vol. 50(11), pages 1587-1602, November.
When requesting a correction, please mention this item's handle: RePEc:iuk:wpaper:2005-07. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rick Harbaugh)
If references are entirely missing, you can add them using this form.