An Empirical Review of Price Behaviour on the Internet

It has been predicted that the Internet is likely to intensify price competition due to its impact in terms of efficiency, capability to create quick search mechanisms, and increase in suppliers, among others. For many traditional retailers the threat is that cutthroat pricing tactics on the Internet will erode their profit margins, for others, the Internet will eliminate their businesses as it has the capability to efficiently bypass intermediaries. This article takes stock of the scarce empirical literature so far by first reviewing the assumptions on which lower prices are expected, secondly, the article demonstrates (through a literature review) whether lower prices and margins are the inevitable result of doing business on the internet. Finally, the article provides with new lines for research around pricing on the Internet. The review of the literature tends to indicate that the Internet has had a major impact on business practices but there is no convincing evidence that prices are considerably cheaper on the Internet even for commodity products. Many companies are avoiding the price sensitivity trap by resorting to marketing tactics such as the concentration of niche markets, creation of brand image and trust, or new price tactics like 'dynamic pricing', 'versioning', 'bundling'.