The Effect of Stock Market Dynamics on Internet Price Competition

The authors’model of Internet pricing competition shows how differences in switching costs, increasing returns to scale, and discount rates between pure and hybrid etailers affected their choice of pricing objective. During the run-up of Internet stocks, differences in these determinants motivated pure e-tailers to build their customer base, whereas hybrid e-tailers leveraged their relationship with existing (offline) customers. In the resulting twotiered pricing structure, pure e-tailers offered substantially lower prices than hybrid e-tailers. The dot.com crash of April 2000 increased the discount rate for pure etailers. Using a longitudinal database of printer prices, the authors’ model correctly predicts changes in overall price dispersion and the direction and magnitude of price changes for pure and hybrid e-tailers associated with this change in the financial markets. This study illustrates how changes in financial markets can affect pricing competition among Internet retailers in a single category.