The Road More Travelled: Web Traffic and Price Competition in Internet Retailing

The Internet is perceived to increase market efficiency, and thus reduce price dispersion. Yet the empirical evidence to support this proposition is mixed. Internet retailers of homogeneous products may choose to actively differentiate their stores and offerings in order to avoid competing just on price. We explore how differentiation among these retailers affects pricing and web traffic. We present empirical results from two homogeneous goods markets, software and personal digital assistants, using price data for a basket of goods from Internet retailer websites. Based on data collected from 90 different retailers and 1,847 product prices, we find that high traffic is associated with lower market prices. However, Internet retailers can mitigate the tendency to compete on price by relying on external linkages from other websites. Furthermore, Internet retailers may use economies of scale and participation with shopbots in conjunction with charging lower prices. Surprisingly, Internet retailer use of economies of scope is associated with higher prices. This indicates that firms may be in a position to avoid price competition by selling a wider product variety.

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