The Internet has great potential as a medium to reach consumers but we stillneed to improve our understanding of the impact of IT on information asymmetriesgoverning buyer and seller positions. In this study we are primarily interestedin exploring differences in pricing strategies between physical and electronicmarkets, across product categories and over time, and to understand thereasons for these differences. Choosing a homogenous product - music compactdisks, we compare prices, price dispersion and price dynamics on the Internetwith brick-and-mortar retailers. We collected price information for 21 current hitsand 23 old-hits albums from top five nationally-known brick-and-mortarCD retailers and nine on-line stores, and repeated the data collection one yearlater. Overall, 905 data points, 572 from the Internet and 333 from brick-and-mortarretail shops were collected. We find that: 1) The Internet market continuesto show price dispersion despite the apparently near zero search costs forconsumers and the growth of market size; 2) Brick-and-mortar markets executemore consistent and dominant short-term discount strategies for current-hitalbums, and as a result, CD prices for old-hit albums are cheaper in the Internetmarket as was found in other studies, but CD prices for current-hit albums in thephysical markets are comparable to prices in the Internet market, and; 3) Pricedynamics alter over time with Internet retailers offering cheaper prices foralbums and apparently employing more frequent and finer price changes. Theresults suggest that it is important to look at dynamic price behavior and productportfolio issues when trying to characterize pricing strategy in this media. Wepropose that IT's role in segmenting customers to extract greater consumersurplus, as well as differences in consumer base and preferences and seller coststructures and differentiation strategies, need to be carefully examined to explainprice dispersion and dynamic price behavior.
Consumer search and dynamic price dispersion: an application to gasoline markets
