Article: Price competition
From Software Business Community
Price competition between online firm and conventional offline firm
Contents
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Definition
Price competition
"Price competition means the rivalry between suppliers based solely on price, usually for commodious or identical items." Business Dictionary
Conventional offline firm
"The conventional offline retailer is based on a physical store where the vendor interacts with the customer. The merchandise is displayed in stores where customers can examine individual products, possibly sample them, and then, if desired, purchase and take them home immediately." [1]
Online firm
"Depending on the product types, online retailing allows the customer to access online information about the product, place an order, pay for the product, and in the case of digital products (such as software, music, video, etc.), have them delivered instantaneously through the Internet." [1]
Price competition between online firm and conventional offline firm
Conventional offline and online firms are heterogeneous market structure. Both have respective pros and cons. Wolfinbarger and Gilly (2001) indicted some benefits of shopping online such as convenience, time savings, increasingly accurate information, lack of lines, etc. However, harder visual inspection, lack of touch, and delayed gratification are some of the disadvantages of online shopping compare to shop at a store. [2]
According to Brown and Goolsbee (2002)’s research[3], internet affected the prices of life insurance and played a role in price discovery. Furthermore, plenty of researches suggest that consumer search costs are reduced even for differentiated products in online market online, thus they are possible to increase competition between providers so that lead to lower prices. [1] Overall, some online prices are lower than offline prices, and some are higher, they all depend on the product.
The substance of the price competition between online firm and conventional offline firm refers to the online access cost, offline transportation cost, and taxes rates. Lee’s research indicated that the optimal tax difference depends not only on the ratio of online access cost and offline transportation cost, but also on tax distortion cost. [4]
Relevance to software business
Example of the phenomena
NetFlix introduced an online subscription DVD rental business, in which customers pay a monthly fee to have a certain number of DVDs in their possession at any time.
Amazon is America's largest online retailer, which started as Earth's biggest bookstore has rapidly become Earth's biggest anything store. According to The Wall Street Journal (28. Jan. 1997), Amazon.com has won significant price competition in both the Internet and conventional channels. [1]
Theoretical approaches
In Se-Hak Chun & Jae-Cheol Kim's research, "pricing strategies between a conventional offline firm and a pure online firm were analyzed through a theoretical approal by constructing a simple duopoly model and discuss some implications with some remarks on welfare." [1]
In Cheryl T. Druehl & Evan L. Porteus' research, the unique Nash equilibria was presented to the resulting dual market game. [2]
In addition, many researchers referenced the competition model of Hotelling (1929) and Tirole (1992).
Currently interesting research questions
Links to related articles
Pricing discrimination technique
See also
Matching and Price Competition
Information Provision and Price Competition
Measuring prices and price competition online: Amazon and Barnes and Noble
Katz, M. and Shapiro, C. 1985. Network Externalities, Competition, and Compatibility. The American Economic Review, 75(3): 424-440.
References
- ↑ 1.0 1.1 1.2 1.3 1.4 Chun, S-H. and Kim, J-C. 2005a. Analysis of price competition and strategic implications for heterogeneous market structure. International Review of Economics and Finance, 14(4): 455-468.
- ↑ 2.0 2.1 Cheryl T. Druehl, Evan L. Porteus, Online versus Offline Price Competition: Market Outcomes and the Effect of Internet Shopping Penetration, 2005
- ↑ Brown, J.R., & Goolsbee A. (2002). Does the Internet make markets more competitve? Evidence from the life insurance industry. Journal of Political Economy, 110(3), 481-597
- ↑ Sang-Ho Lee, Price competitions between online and offline firms in an electronic commerce market and discriminatory taxation, 2005