Pricing strategies on the Web: evidence from the online book industry

Using data collected between August 1999 and January 2000, we examine firm-level pricing strategies for thirty-two online bookstores. The data cover 424 books, including New York Times bestsellers, computer bestsellers, and random books. One prediction is that the reduction in search costs on the Internet relative to the physical channel would force prices to cost and standard deviation to zero, since no firm could charge higher prices. Between August 1999 and January 2000, standard deviation of price fell somewhat, and prices for the different types of books were flat or increasing and substantially above cost. Thus predicted price convergence has not yet occurred. Prices are, however, lower in segments with more competition, such as bestsellers, suggesting that some type of convergence may be happening in these segments. Interestingly the standard deviation of prices appears to be higher not lower in segments with more competition. Regressions to further investigate these effects suggest that increased competition as measured by an increase in the number of stores selling the book has different effects on price and standard deviation for different categories of books. Thus there is no clear relationship between competition and price or standard deviation. Firm level strategies vary across stores, with some specializing in certain types of books, others using the web as advertising, and still others offering low prices. For those offering low prices, most stores focused on marginally undercutting Amazon, usually by 10 cents or less. As of November 2000, some of these stores have gone out of business or changed their business model, and the surviving ones appear to still be at risk. We would like to thank Bo-Han Chen, Yimin Yang, Danny Fernandes, and Kartik Hosanager for excellent research assistance. We would also like to thank: Y. S. Chi of Ingram Book Group for insights on the wholesale market for books; Andy Ross of Cody Books for providing information on wholesale prices; Paul Mozak and Chris Nichols of Borders Group and John Vogus of Allbooks4Less.com for discussions of the book industry; and Mike Smith and seminar participants at the NBER 2000 Summer Meetings for helpful comments on the paper.