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FRICTIONLESS COMMERCE? (hint: perfect market) Give us a few words/ ideas to describe it… Andrea

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Homogenous products Perfect consumer knowledge Many producers Many consumers No barriers to entry Andrea Perfect Market

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DO YOU THINK THE INTERNET PROVIDES FRICTIONLESS MARKETS Develyn ?

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Frictionless Commerce? A comparison of Internet and Conventional Retailers. Erik Brynjolfsson – Michael D. Smith MIT Sloan School of Management Management Science © Vol. 46, No. 4, April 2000 pp. 563-585 Suleman

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers The Authors Erik Brynjolfsson Professor of Management at the MIT Sloan School of Management; Director of Centre for eBusiness at MIT. Michael D. Smith Assistant Professor of IS and Marketing at Carnegie Mellon University. Suleman

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers ecommerce…The early years Scope of the Project Data Collection Methodology Empirical Results Conclusion Looking forward… Erik Brynjolfsson & Michael D. Smith Suleman

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Other Relevant Research Degeratu et al. (1998) – Grocery sales: People less price sensitive online. Shankar et al. (1998) – Travellers: Prior positive experience leads to less price sensitivity. Lee (1998) – Car auctions: Internet auctions found higher prices than conventional auctions. Clemons et al. (1998) – Airline tickets: prices can vary by >20%. Suleman

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers eCommerce…The early years Value of eCommerce market State of the Technology Who were are buyers? Suleman

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers eCommerce…The early years Suleman

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers North American Market Carried out over 15 Months February 1998 – May 1999 41 Internet, Conventional & Hybrid stores 8,500 Prices Checked Suleman Scope of the Project

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Scope of the Project Homogeneous Products CD Books 20 Books and 20 CDs titles per month. Suleman

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Data Collection Method Checked 8 Internet only retailers 8 Conventional retailers (bricks & mortar) 8 Internet-Hybrid retailers 8 Conventional-Hybrid retailers Suleman

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Data Collection Method Internet Retailers Amazon.com CD Now Buy.com Spree.com CD Universe.com Music Boulevard Hybrid Retailers Barns & Noble Borders.com Powell’s Books Wordsworth Blockbusters Tower Records Conventional Retailers Crown Sam Goody Waterstones HMV The Wall Strawberries Suleman

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Data Collection Method Method of price checks Internet web pages Personal visits Suleman

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Results Erik Brynjolfsson & Michael D. Smith’s empirical analysis included: Relative Price levels Price changes over time Price dispersion across stores Andrea

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Frictionless Commerce? A comparison of Internet and Conventional Retailers Results Relative Price Levels Null Hypothesis*: Mean prices on the Internet are equal to mean prices in conventional stores. * Null Hypothesis – a testable proposition set up to be refuted. Andrea

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Relative Price Levels Frictionless Commerce? A comparison of Internet and Conventional Retailers Results Andrea

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Results Relative Price Levels With these results Brynjolfsson & Smith rejected the null hypothesis in favour of: Internet prices are lower than conventional stores. Andrea

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Results Price Changes and Menu Costs* 2 elements: Frequency of Price Change Size of Price Change * Menu costs: Are costs a retailer incurs when changing posted prices Andrea

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Results Price Changes and Menu Costs Null Hypothesis: Price changes are the same for conventional and internet retailers. Andrea

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Results Price Changes and Menu Costs Andrea

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Results Price Changes and Menu Costs They rejected the Null Hypothesis for: Price changes on the Internet are smaller than prices in Conventional outlets. Andrea

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Results Price Dispersion* Null Hypothesis: Dispersion statistics have the same pattern for conventional and internet retailers. * Price Dispersion is the difference in prices for identical goods between one retailer and another. Andrea

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Price Dispersion Average price range of both Internet : Andrea Frictionless Commerce? A comparison of Internet and Conventional Retailers Results

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Results Price Dispersion The null hypothesis was rejected for: 8 out of the 12 months for books 7 out of 12 months for CDs The new hypothesis is: Dispersion is larger among the Internet prices. Andrea

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Price Dispersion Price dispersion is usually ascribed to: Search costs Asymmetrically informed consumers Product heterogeneity Andrea Frictionless Commerce? A comparison of Internet and Conventional Retailers Results

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Conclusion Hypotheses Internet prices are lower than conventional stores. Price changes on the Internet are smaller than prices in Conventional outlets. Dispersion is larger among the Internet prices. Andrea

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Frictionless Commerce? A comparison of Internet and Conventional Retailers Conclusion Analysis indicate that Internet retailers charge lower prices than conventional whether prices include shipping, handling, taxes etc. Conventional Retailers will find it increasingly difficult to compete. Internet Retailers make smaller price changes more frequently. Posted prices vary by as much as 47% across Internet retailers. Develyn

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Frictionless Commerce? A comparison of Internet and Conventional Retailers Conclusion Retailers with the lowest prices do not necessarily mean the most sales. While there is lower friction in many dimensions of Internet competition: Branding, Awareness, and Trust remain sources of heterogeneity among retailers and therefore a strategic advantage. Develyn

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Frictionless Commerce? A comparison of Internet and Conventional Retailers Conclusion Dispersion in weighted prices is lower on the Internet than in conventional outlets – reflecting a dominance among certain heavily branded retailers. However Brynjolfsson and Smith still focus on the wider dispersion information and ponder this heterogeneity among Internet retailers. From this they conclude that rather than equalising the internet is amplifying the difference among sellers. Develyn

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Frictionless Commerce? A comparison of Internet and Conventional Retailers Conclusion Some final questions asked by the paper are... Is this a symptom of an immature market? Or does it reflect more permanent characteristics of Internet retailing? What are the sources of price advantage on the internet in the future? Develyn

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Frictionless Commerce? A comparison of Internet and Conventional Retailers Ecommerce Now… Characteristic of the Internet today: Seller anonymity: This raises a barrier to entry, the seller must advertise heavily to gain consumer trust. Buyer loses anonymity (through form filling and having sales tracked); thus the seller can price discriminate. The Internet does not seem to be offering the frictionless market promised. Develyn

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Ecommerce Now… Fuelled by a steady stream of new online shoppers and new product category sales, US eCommerce will grow at a 19% CAGR over the next five years. Most significant, online retail will reach nearly $230 billion and account for 10% of total US retail sales by 2008. Forrester Research by Carrie A. Johnson with Kate Delhagen, Esther H. Yuen July 25, 2003 Develyn

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Ecommerce Now… This year, European Net shoppers will spend an average of €223 online, bringing Europe's online retail market to €40 billion. As both consumers and Net retailers get smarter about using the Web, online retail growth will continue unimpeded, taking 8% of total retail sales by 2009. For the next four years, the UK will dominate Europe's eCommerce market, but Germany will catch up by 2009. Travel will keep generating the most online sales. Forrester Research by Hellen K. Omwando with Jaap Favier, Tim van Tongeren (March 1, 2004) Develyn

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Ecommerce Now… Develyn Forrester Research

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Ecommerce Now… Develyn Internet Retailer

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Bibliography Saudners, M. Lewis, P. & Thornhill, A (2003) Research Methods for Business Students, Prentice Hall, Harlow Sloman, J. & M. Sutcliffe, M. (2001) Economics for Business, Prentice Hall, Harlow Specter, Robert (2000) Amazon.com - Get Big Fast, Random House, London Rowlatt, Amanda (2001) Measuring E-commerce: Developments in the United Kingdom from “Economic Trends” No. 575 October 2001 Eric Brynjolfsson :http://ebusiness.mit.edu/erik/ Michael D Smith: http://www.heinz.cmu.edu/~mds/ Omwando, Hellen K. Favier, Jaap. van Tongeren, Tim (March, 2004) Forrester Research Johnson, Carrie A. Delhagen, Kate. Yuen, Esther H. (July, 2003) Forrester Research Develyn

Frictionless Commerce? A comparison of Internet and Conventional Retailers: 

Frictionless Commerce? A comparison of Internet and Conventional Retailers Bibliography Jon M. Peha (1999) - Making the Internet Fit for Commerce http://www.ece.cmu.edu/~peha/ecommerce_policy.pdf Develyn