NCPA - National Center for Policy Analysis

Web-Based Competition not so Different

September 12, 2003

Some economists expected Web-based selling to increase competition to the point that prices for common commodities would be uniform and so low that companies barely survived, as if "perfect" competition was something that existed outside of economics textbooks. However, a recent study confirms that market competition on the Web is pretty much like markets everywhere.

Writer Virginia Postrel reports on an article in the June issue of Quantitative Marketing and Economics by researchers Austan Goolsbee, of the University of Chicago Graduate School of Business, and Judith Chevalier, of theYale School of Management. The researchers recorded prices and sales for more than 18,000 titles at the Web sites of Amazon.com and Barnes and Noble (BN.com) in 2001.

Sure enough, they found that higher prices mean fewer sales, but the effects are notably different at the two sites:

  • Both sites lose customers when prices rise, but a 1 percent price increase at BN.com pushes sales down 4 percent, whereas the same increase at Amazon reduces sales by only 0.5 percent -- a net revenue gain.
  • BN.com picks up just about all the customers Amazon loses when it raises prices but Amazon gets only a small number of the customers BN.com loses -- they either go to an even cheaper retailer or perhaps don't buy at all.

That is because Amazon has built a large base of customers who won't bolt to the competition if you raise prices a little bit, whereas Barnes & Noble caters to discount hunters with little loyalty to its particular service.

Source: Virginia Postrel, "The Internet Book Race," New York Times, September 11, 2003; based upon Judith Chevalier and Austan Goolsbee, "Measuring prices and price competition online: Amazon and Barnes and Noble," Quantitative Marketing and Economics, June 2003.

 

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