Is the internet making retail transactions more efficient? Comparison of online and offline CD retail markets

If a “perfect market” in economic theory ever comes true in the digital world, sellers will not be able to gain profits above the marginal costs, and the resource allocation will become much more efficient. This paper attempts to investigate whether this prediction is true in the electronic marketplace. We have observed 2,000 prices listed by online and offline retailers. By comparing price levels, price adjustment, and price dispersion among CD (Compact Disk) retailers, we empirically test whether online retail channels are more efficient than conventional retailers. We have found that prices on the Internet are lower than those in conventional outlets. It is also found that Internet retailers adjust theirs price by much smaller increments than offline counterparts, in order to flexibly respond to demand and supply conditions. Finally, the price dispersion among Internet retailers is lower than the dispersion among traditional retail stores. Our findings suggest that Internet improves efficiency of markets by lowering costs to obtain and to disseminate information on products and prices.