Consumer search and pricing behavior in Internet markets

Abstract

Throughout economic history, changes in technology have had a substantial impact on consumers' search and transportation costs and, consequently, on the size of the relevant market. One example is the progressive decline in transportation costs that historically has taken place through the use of faster means of transportation (sailing ships, machine ships, trains, cars, airplanes, etc.). This reduction in transportation costs has made it possible for consumers to search for products in markets that were previously beyond their horizon. In our present times, the increased use of the Internet can be viewed in a similar way. Due to a reduction in search costs, the Internet allows consumers to become active in markets where they were not active before. The general consensus among academics and leading businessmen seems to be that increased use of the Internet will lower consumers' search costs and consequently intensify price competition. The Internet is thus regarded as reducing commodity prices and promoting economic efficiency. Bakos (1997) argues: Electronic marketplaces are likely to move commodity markets closer to the classical ideal of a Walrasian auctioneer where buyers are costlessly and fully informed about seller prices … We expect that electronic marketplaces typically will sway equilibria in commodity markets to favor the buyers, will promote price competition among sellers, and will reduce sellers' market power. Moreover, Jeff Bezos, founder of Amazon.com has argued: We on the Internet should be terrified of customers because they are loyal to us right up to the point that someone else offers a better service.[…]