Online price competition within and between heterogeneous retailer groups

Abstract

This study presents a model of price competition in a market for a homogenous good with many asymmetrically positioned retailers, a typical example of which could be the online markets for books, music, movies or software. These markets are highly competitive oligopolies served by hundreds of active retailers and that have been affected by information technologies such as price comparison engines and shopping bots. In these markets, firms can only identify broad group memberships to clusters of firms, and compete within and across clusters based on this information, due to the incompleteness of information on the characteristics of firms. The characteristics of the firms that shape their competitive behavior are their established loyal segment sizes and potential comparison shopper segment sizes. To analyze such markets, we develop and solve a static game of price competition in an asymmetric oligopoly with numerous clusters of firms. In our analysis we see that the firms with the smallest loyal segment sizes and the largest switcher segment sizes engage in a fierce price competition while the members of all other groups prefer to price at their reservation price points. We also test and provide empirical support for our model predictions using pricing data on three categories. Our data set contains prices on 112 printers from 20 retailers, 95 cameras from 53 retailers and 1388 books from 15 retailers.