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

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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Paper provided by NET Institute in its series Working Papers with number 11-30.

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Length: 33 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:net:wpaper:1130
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  1. 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.
  2. Kenneth Train, 2003. "Discrete Choice Methods with Simulation," Online economics textbooks, SUNY-Oswego, Department of Economics, number emetr2, March.
  3. Blum, Bernardo S. & Goldfarb, Avi, 2006. "Does the internet defy the law of gravity?," Journal of International Economics, Elsevier, vol. 70(2), pages 384-405, December.
  4. Lesley Chiou, 2009. "Empirical Analysis of Competition between Wal-Mart and Other Retail Channels," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(2), pages 285-322, 06.
  5. Michael Smith & Erik Brynjolfsson, 1999. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Computing in Economics and Finance 1999 1022, Society for Computational Economics.
  6. Jenny C. Aker, 2010. "Information from Markets Near and Far: Mobile Phones and Agricultural Markets in Niger," American Economic Journal: Applied Economics, American Economic Association, vol. 2(3), pages 46-59, July.
  7. J. Yannis Bakos, 1997. "Reducing Buyer Search Costs: Implications for Electronic Marketplaces," Management Science, INFORMS, vol. 43(12), pages 1676-1692, December.
  8. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
  9. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
  10. Robert Jensen, 2007. "The Digital Provide: Information (Technology), Market Performance, and Welfare in the South Indian Fisheries Sector," The Quarterly Journal of Economics, MIT Press, vol. 122(3), pages 879-924, 08.
  11. Florian Diekmann & Brian E. Roe & Marvin T. Batte, 2008. "Tractors on eBay: Differences between Internet and In-Person Auctions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(2), pages 306-320.
  12. Jeffrey R. Brown & Austan Goolsbee, 2002. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 481-507, June.
  13. 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.
  14. Eric Overby & Sandy Jap, 2009. "Electronic and Physical Market Channels: A Multiyear Investigation in a Market for Products of Uncertain Quality," Management Science, INFORMS, vol. 55(6), pages 940-957, June.
  15. Diekmann, Florian & Roe, Brian E. & Batte, Marvin T., 2008. "AJAE Appendix: Tractors on eBay: Differences between Internet and In-Person Auctions," American Journal of Agricultural Economics Appendices, Agricultural and Applied Economics Association, vol. 90(2), May.
  16. Ali Hortaçsu & F. Asís Martínez-Jerez & Jason Douglas, 2009. "The Geography of Trade in Online Transactions: Evidence from eBay and MercadoLibre," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 53-74, February.
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