Follow the leader? Strategic pricing in e-commerce

Conventional wisdom and current research suggest that the Internet will lower electronic commerce (EC) product prices by causing intense competition among vendors. However, this does not seem to be happening. This research presents a multi-industry investigation of pricing behavior using a customized data-collecting Internet agent that we call the Time Series Agent Retriever (TSAR). We use theories of information asymmetry and Stackelberg pricing to show how Internet technology increases the ability of firms to tacitly collude to keep prices higher than expected in the presence of intense competition. Our results are developed using an econometric technique called vector autoregression (VAR). They show that Internet technology creates the potential to lower information asymmetry among Internet-based sellers. Thus, it allows rapid reaction between competitors, thereby allowing firms to avoid the intense competition predicted by current theory. We find that fast competitor reaction to the price promotions of a firm minimizes any profit derived from increased market share that the firm hopes to achieve from the lower price. This short reaction time allows Stackelberg pricing, in contrast with Bertrand-Nash pricing, which is often discussed in research on pricing in Internet-based selling. _____________________________________________________________________________________