Brynjolfsson and Smith (2000)

Source Details

Brynjolfsson and Smith (2000)
Title:	Frictionless commerce? A comparison of Internet and conventional retailers
Author(s):	Brynjolfsson, E., Smith. M.D.
Year:	2000
Citation:	Brynjolfsson, E., & Smith, M. D. (2000). Frictionless commerce? A comparison of Internet and conventional retailers. Management Science, 46(4), 563-585.
Link(s):	Definitive , Open Access
Key Related Studies:	Haussman (1997) Bailey (1998) Urban et al. (1998) Smith et al. (2000)
Discipline:	E3: Prices; Business Fluctuations; and Cycles L2: Firm Objectives; Organization; and Behavior
Linked by:

About the Data
Data Description:	The study tracks the prices of 20 book titles and 20 CD titles at Internet-only retailers, conventional retailers, and hybrid retailers.
Data Type:	Secondary data
Secondary Data Sources:	Various ananymous retailers' websites
Data Collection Methods:	Quantitative Collection Methods
Data Analysis Methods:	Quantitative Analysis Methods Descriptive statistics (counting; means reporting; cross-tabulation)
Industry(ies):	Publishing of books, periodicals and other publishing Sound recording and music publishing
Country(ies):	United States
Cross Country Study?:	No
Comparative Study?:	Yes
Literature review?:	No
Government or policy study?:	No
Time Period(s) of Collection:	1998-1999
Funder(s):	NASA, the OECD, the MIT Center for Coordination Science, the Center for eBusiness@MIT under a grant from Fleet Bank, and the Stanford Computer Industry Project

Abstract

There have been many claims that the Internet represents a new nearly “frictionless market.” Our research empirically analyzes the characteristics of the Internet as a channel for two categories of homogeneous products—books and CDs. Using a data set of over 8,500 price observations collected over a period of 15 months, we compare pricing behavior at 41 Internet and conventional retail outlets. We find that prices on the Internet are 9–16% lower than prices in conventional outlets, depending on whether taxes, shipping, and shopping costs are included in the price. Additionally, we find that Internet retailers’ price adjustments over time are up to 100 times smaller than conventional retailers’ price adjustments—presumably reflecting lower menu costs in Internet channels. We also find that levels of price dispersion depend importantly on the measures employed. When we compare the prices posted by different Internet retailers we find substantial dispersion. Internet retailer prices differ by an average of 33% for books and 25% for CDs. However, when we weight these prices by proxies for market share, we find dispersion is lower in Internet channels than in conventional channels, reflecting the dominance of certain heavily branded retailers. We conclude that while there is lower friction in many dimensions of Internet competition, branding, awareness, and trust remain important sources of heterogeneity among Internet retailers.

Main Results of the Study

• Internet retailers charge lower prices than conventional retailers—whether one considers prices alone or “prices” including the costs of getting the item to the users’ homes (e.g., shipping and handling, taxes, mileage).* Internet retailers make price changes in smaller increments than comparable conventional retailers. Smaller menu costs may allow Internet retailers to more efficiently adjust their prices to structural changes in the market.* The level of price dispersion on the Internet depends importantly on the measures employed. In light of both existing theory and the earlier results on price levels and price changes, the dispersion in posted prices is surprisingly high.* Internet price dispersion may arise from two different sources of retailer heterogeneity: heterogeneity in customer awareness, and heterogeneity in retailer branding and trust.

Policy Implications as Stated By Author

The authors state the convenience of a stronger research focus on the question of whether differences between Internet and non-Internet sellers are a symptom of an immature market or reflect more permanent characteristics of Internet retailing.

Coverage of Study

Coverage of Fundamental Issues

Issue	Included within Study
Relationship between protection (subject matter/term/scope) and supply/economic development/growth/welfare
Relationship between creative process and protection - what motivates creators (e.g. attribution; control; remuneration; time allocation)?
Harmony of interest assumption between authors and publishers (creators and producers/investors)
Effects of protection on industry structure (e.g. oligopolies; competition; economics of superstars; business models; technology adoption)
Understanding consumption/use (e.g. determinants of unlawful behaviour; user-generated content; social media)

Coverage of Evidence Based Policies

Issue	Included within Study
Nature and Scope of exclusive rights (hyperlinking/browsing; reproduction right)
Exceptions (distinguish innovation and public policy purposes; open-ended/closed list; commercial/non-commercial distinction)
Mass digitisation/orphan works (non-use; extended collective licensing)
Licensing and Business models (collecting societies; meta data; exchanges/hubs; windowing; crossborder availability)
Fair remuneration (levies; copyright contracts)
Enforcement (quantifying infringement; criminal sanctions; intermediary liability; graduated response; litigation and court data; commercial/non-commercial distinction; education and awareness)

Datasets

Sample size:	20
Level of aggregation:	Book title price
Period of material under study:	1998-1999

Sample size:	20
Level of aggregation:	CD title price
Period of material under study:	1998-1999