Pricing on the Internet

It is frequently claimed that the growth of e-commerce has created a more competitive environment. It is argued that lower production costs of online retailers encourages new entry in previously concentrated sectors, and a marked reduction in search costs and switching costs increase the intensity of competition. The limited evidence that exists paints a more mixed picture. Many online markets tend to be advertising-intensive, creating a tendency towards concentration; search and price comparison are not perfect; firms can create product heterogeneity and raise switching costs to dampen price competition. Where firms have some market power, as in the market for information goods, we expect discriminatory pricing to become the norm. Apart from posted prices, the internet has extended the use of auctions, even to relatively low-value goods previously traded in thin local markets. The lowcost, relatively frictionless online auction markets have increased profits as well as economic efficiency, and may emerge as the principal pricing method for a large number of goods and services. * Department of Economics, Birkbeck College, Gresse Street, London W1P 2LL. email: [email protected], [email protected]