Price Elasticity in Electronic Markets: Evaluating Quality and Product Information for Search and Experience Products

Evidence has shown that the provision of product information in electronic markets decreases the price elasticity of demand due to the ‘fit’ cost. This effect, however, could differ according to how consumers perceive the value of the product information to their quality evaluation procedures. If the information has very limited value, then they may not rely on it; thus, the demand elasticity may not decrease as predicted. The value of information to the quality evaluation procedure is determined by the consumer’s difficulty in judging product quality. Specifically, product attributes related to the quality of experience products cannot be ascertained by prior search and the value of information in this case is therefore low. Based on this prediction, this research investigates how the price elasticity of demand differs in relation to the difficulty of evaluating quality and how it affects the influence of product information provided in electronic markets on elasticity. Groupon sales data are used to empirically test these questions. The findings confirmed that elasticity is lower for experience products than for search products. This also suggests that the provision of product information lowers elasticity in differentiated product markets and that its effect is stronger for search products than experience products.