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The Effect of Electronic Commerce on Geographic Trade and Price Variance in a Business-to-Business Market

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Abstract

Imbalances in supply and demand often cause the price for the same good to vary across geographic locations. Economic theory suggests that if the price differential is greater than the cost of transporting the good between locations, then buyers will shift demand from high-price locations to low-price locations, while sellers will shift supply from low-price locations to high-price locations. This should make prices more uniform and cause the overall market to adhere more closely to the “law of one price.” However, this assumes that traders have the information necessary to shift their supply/demand in an optimal way. We investigate this using data on over 2 million transactions in the wholesale used vehicle market from 2003 to 2008. This market has traditionally consisted of a set of non-integrated regional markets centered on market facilities located throughout the United States. Supply / demand imbalances and frictions associated with trading across distance created significant geographic price variance for generally equivalent vehicles. During our sample period, the percentage of transactions conducted electronically in this market rose from approximately 0% to approximately 20%. We argue that the electronic channel reduces buyers’ information search costs and show that buyers are more sensitive to price and less sensitive to distance when purchasing via the electronic channel than via the traditional physical channel. This causes buyers to be more likely to shift demand away from a nearby facility where prices are high to a more remote facility where prices are low. We show that these “cross-facility” demand shifts have led to a 25% reduction in geographic price variance during the time frame of our sample. We also show that sellers are reacting to these market shifts by becoming less strategic about vehicle distribution, given that vehicles are increasingly likely to fetch a similar price regardless of where they are sold.

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  • Eric Overby & Chris Forman, 2011. "The Effect of Electronic Commerce on Geographic Trade and Price Variance in a Business-to-Business Market," Working Papers 11-30, NET Institute.
  • Handle: RePEc:net:wpaper:1130
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    Cited by:

    1. Eric Overby & Jonathan Clarke, 2012. "A Transaction-Level Analysis of Spatial Arbitrage: The Role of Habit, Attention, and Electronic Trading," Management Science, INFORMS, vol. 58(2), pages 394-412, February.

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    More about this item

    Keywords

    electronic commerce; markets; price dispersion; variance; wholesale automotive; auctions; buyer reach; search costs; choice model;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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