Competition in e-Markets: Price Levels and Price Dispersion in the on-line Music Market

This paper examines competition in e-markets by comparing price levels and price dispersion in the on-line music market. The data consists of price information on CDs pure-play Internet and hybrid firms in North American and European markets. The sellers are divided in groups according to a geographical location, a brand valuation and a variety of product offerings. We find that pure price levels are significantly different between the North American and European sellers and between the sellers of a wide product offering and a simple product offering. Branding does not seem to allow for a price premium. Price dispersion exists in the market. Prices are more dispersed among fringe sellers than branded sellers. The results indicate that the market is characterized by practices of imperfect competition: collusion, oligopoly and monopolistic competition. Our tests show that geographical location matters in e-markets, and a variety of product offerings can create price premiums. The North American music market has a group of firms or a single dominant firm, with whom most sellers are willing to match their prices. We also suggest that the fringe sellers act as competitive monopolists. However, the pureplay branded sellers are locked in oligopoly or they collude in pricing, whereas the existence of physical retail channel influences pricing strategies employed by the hybrid sellers. Therefore, the on-line music market proves that expectations of free competition in on-line markets are not fulfilled.