Information Availability and Consumer Preference: Can Online Retailers Benefit from Providing Access to Competitor Price Information?

This paper examines consumers’ reactions to the provision of direct access to uncensored competitor price information within an electronic store. Based on notions derived from signaling theory, prior research on trust, and attribution theory, we propose that the facilitation of such access may have a positive impact on consumer preference for an online retailer. Furthermore, we predict that this effect will be moderated by how attractive a vendor’s prices are. The results of a laboratory experiment demonstrate the possibility that a retailer’s act of providing access to uncensored competitor price information may result in enhanced long-term preference for that vendor, especially if the latter’s prices are neither clearly superior nor obviously inferior to those of its competitors. Finally, this positive effect of facilitating access to competitors’ prices on consumer preference is mediated by the perceived trustworthiness of the online retailer. Information Availability and Consumer Preference 1 From a consumer’s perspective, one of the most important advantages of Internet-based electronic shopping environments relative to traditional, bricks-and-mortar retail settings is the drastically reduced cost of search for information about market offerings (see, e.g., Bakos 1997; Häubl and Trifts 2000). Performing tasks such as identifying products for possible purchase and making price comparisons across vendors tends to require significantly less time and effort in a digital than in a physical marketplace. This basic difference, which is due primarily to the fundamental technologies for networked digital communication, is further enhanced by the existence of (1) digital shopping malls and other forms of virtual co-location, (2) online decision aids for preference-based product screening (e.g., electronic recommendation agents), and (3) software tools for systematic cross-vendor comparisons (e.g., shopbots). In addition to allowing consumers to systematically search for information about different online vendors’ products and prices at very low cost, electronic marketplaces also enable firms to do the same. That is, the ability of vendors to observe, record, and process — in an automated fashion — aspects of their competitors’ product offerings is significantly greater in a digital marketplace than in the bricks-and-mortar world. For example, it is quite possible for a retailer to deploy software technology that automatically searches its main competitors’ electronic stores in order to observe, for each of a large number of common products, the prices charged by each vendor. This could be done either on a continuous basis (i.e., practically in real time) or in discrete short intervals (e.g., once a day). Given that retailers have access to a wealth of up-to-date information about other vendors’ product offerings, there are different ways in which they may utilize this capability. In this paper, we focus on one potential use of this type of competitor information by an online Information Availability and Consumer Preference 2 retailer — providing shoppers with access to uncensored information about its competitors’ prices. At first glance, such an act may seem counterintuitive, risky, and unwise on the part of the vendor. However, we propose that, under certain circumstances, an online retailer may benefit from providing direct access to uncensored competitor price information within its own electronic store. In particular, doing so may influence a consumer’s trust in, and long-term preference for, the retailer. In addition to the effect of facilitating access to competitor information, we also investigate whether such an effect is moderated by the objective market position of the retailer. We provide a theoretical framework for this phenomenon, present a set of hypotheses about both the nature of the effect and the circumstances under which it is most likely to occur, and report the results of an empirical study aimed at testing these hypotheses. The paper is organized as follows. First, we discuss the theoretical background that leads us to propose that online retailers may benefit from providing access to competitor information. This is followed by the development of a set of specific hypotheses that characterize the predicted effects. We then present the method and results of an experiment designed to test these predictions. The results show that facilitating access to uncensored competitor price information may have a favorable effect on consumer trust in, and preference for, a vendor, particularly when the latter’s objective market position is moderately favorable. The paper concludes with a brief discussion of our findings and of the contributions of this work to different bodies of literature. Information Availability and Consumer Preference 3 THEORETICAL BACKGROUND Electronic Access to Uncensored Competitor Price Information Much like providing information about competitors’ prices in a traditional retail environment (e.g., by displaying a competitor’s ad in a physical store), an online retailer can also choose to provide the visitors to its electronic store with access to such competitor information (see, e.g., Progressive Insurance at www.progressive.com). Unlike physical retail settings, where comparisons with competing vendors tend to be possible only in terms of a small number of products and are very difficult to keep current, electronic shopping environments offer the capability of providing access to competitor price information for a virtually unlimited number of products and in an up-to-date fashion. Due to the dynamic character of digital shopping interfaces, online retailers are able to provide such competitor information interactively (i.e., in response to a consumer’s request), directly (i.e., without filtering or censoring), and in a highly personalized manner (i.e., only for the specific products that a shopper is interested in). When an online retailer provides information only about its own product offerings, shoppers must engage in further search in order to be able to compare vendors. Such a search could be performed either by visiting other stores or by using a third-party intermediary or agent (e.g., a shopbot) that provides cross-vendor comparisons. Consumers who use such an intermediary are likely to view it as means of reducing their search effort, and they will tend to attribute the benefits they obtain from this assistance to the intermediary. However, if the same kind of technology for comparing prices across vendors were incorporated into an online retailer’s site, shoppers should attribute the benefits of using this comparison tool to the vendor. Information Availability and Consumer Preference 4 In particular, consumers may infer that a retailer that provides access to uncensored competitor price information wishes to assist them in making a well-informed purchase decision. Findings from the persuasive communications literature suggest that consumers tend to respond more favorably to comparative advertising formats than to non-comparative ones (e.g., Grewal et al. 1997). However, subjecting itself to uncensored side-by-side comparisons with its competitors also poses some risks to a retailer. In particular, the outcome of such a comparison for a given product could turn out to be self-damaging in that one or more competing vendors might happen to offer the product at a lower price. Therefore, providing access to competitor price information will not always be beneficial to a vendor, especially in the short run. It is well known that the way in which information is displayed influences decision making by affecting the ease with which different pieces of information may be processed (Häubl and Murray 2002; Kleinmuntz and Schkade 1993). At the level of an individual purchase, facilitating side-by-side comparisons should render consumers more likely to choose whichever alternative appears most attractive in terms of the presented information. However, past research on information display formats has been limited to the immediate — rather than longer-term — effects of format on decision making, and has failed to recognize the possibility that study participants may attribute the provision of a particular display format to someone other than the experimenter. In this paper, while we acknowledge the potential negative implications of encouraging price comparisons for an online retailer on an individual transaction, we focus on the longer-term impact of providing access to competitor price information in repeated interaction between the consumer and the firm. In doing so, we distinguish between two aspects of facilitating this type of information access: (1) the additional information conveyed to a consumer through the crossInformation Availability and Consumer Preference 5 vendor comparison and (2) the act of providing the consumer with access to uncensored competitor price information. These two aspects may have opposing effects in that the comparative information may be unfavorable for the online retailer, while the act of facilitating such a comparison may enhance the vendor’s perceived trustworthiness. We propose that, despite the potential for short-term losses in sales, there is a significant potential for online retailers to use the provision of access to competitor information in building stronger relationships with their customers. In the long run, a retailer that provides access to uncensored competitor price information may benefit from an enhanced perceived trustworthiness and, ultimately, an increased likelihood of being chosen by consumers. The Provision of Access to Competitor Information and Signaling Theory Signaling theory emerged from the study of the economics of information, particularly in situations where different parties in a transaction have different levels of information relevant to the transaction (Spence 1974). Any actions and/or announcements of a firm that convey information about its intentions and abilities represent signals (Porter 1980). Signaling has been used to analyze a firm’s relationships with its customers (e.g., Boulding and Kirmani 1993; Kirmani and Rao 2000), its competitors (e.g., Moore 1992; Prabhu and Stewart 2001), and members of its distribution channel (e.g., Anderson and Weitz 1992). Recent work has examined how signals may be used to communicate the unobservable quality of a product (Boulding and Kirmani 1993; Kirmani and Rao 2000). We extend signaling theory to situations in which characteristics of a retailer are unobservable, and use it to explain how a retailer’s provision of access to uncensored competitor price information may affect its Information Availability and Consumer Preference 6 relationships with (prospective) customers. Signaling has been used as a way to resolve the problem of adverse selection, which occurs when low-quality firms falsely claim to be of high quality (Eisenhardt 1989). Adverse selection may be more likely in online than in bricks-andmortar retailing. For example, while few consumers question the security of transactions in physical stores, security concerns appear to be one of the major barriers for electronic commerce (see, e.g., Pastore 2001). Therefore, signals that convey information about unobservable firm characteristics to consumers should play an important role in electronic retailing. The provision of access to uncensored competitor information is similar to other investments in reputation (such as advertising and brand building) in that it requires an advance expenditure or commitment by the firm. Therefore, such an action can be conceptualized as a sale-independent default-independent signal (see Kirmani and Rao 2000). We propose that such a signal will have a positive effect on consumers’ perceived trustworthiness of, and long-term preference for, the retailer that facilitates access to uncensored competitor price information.