Will the Growth of Multi-Channel Retailing Diminish the Pricing of Efficiency of the Web?
Fang-Fang Tang and Xiaolin Xing
Internet retailing has entered a new era when more and more conventional retailers gain grounds on the Web while the pure Internet retailers encounter economic difficulties and fail widely. A natural question is how these mule-channel retailers compete with online-only retailers on the Web. Based on comparison between online retailing and traditional retailing, the various previous results lend support to the hypothesis of superior pricing efficiency in online markets to offline markets.
Unlike the previous studies, we explore the different pricing behavior between online-only retailers (DotComs) and online branches of mufti-channel retailers (MCRs). In particular, we seek to contrast the pricing of mufti-channel retailers with those of online-only retailers and derive implications. Previous findings show that traditional stores charge higher prices than online retailers. Since multichannel retailers may wish to coordinate prices across their different channels to prevent destructive competition among them, they may charge higher prices on the Web than their online-only competitors, although it is not necessary for a mufti-channel retailer to charge the same prices online and offline. What would happen if the online retail channel were to become increasingly dominated by mufti-channel retailers?
To answer this question, we investigate prices of DVDs sold on the Web by both online-only retailers and online branches of multi-channel retailers. We test: (a) whether DotComs offer prices lower than MCRs; (b) whether the dispersion of prices exhibited by Dotcoms is smaller than that by MCRs; and (c) whether the two types of online retailers adjust their prices frequently and whether at similar frequencies or magnitudes.
Focusing on standardized END brands, we gathered a data set of 4896 observations; we find that prices by pure Internet retailers are significantly lower than prices by online multi-channel retailers by an average of 53.27 or 14 percent. The evidence also shows that the price dispersion is sharply lower among the pure Internet retailers than that among the multichannel retailers online. Price changes by both types are few, but adjustment magnitudes are large. This reveals that both types of online retailers do not change their prices frequently despite the claim that menu cost might be negligible for the online market. The DotCom retailers changed prices only three percent of the time. while the MCRs did so only seven percent of the time. Hence, from a price change perspective, the market appears a bit sleepy.
Our findings suggest that there be two groups of consumers who are buying. The first are essentially price shoppers who compare prices and purchase from the DotComs. The extent of consumer search by this group forces DotCom prices downward toward the true costs of Web based operation. Contrarily, consumers buying from the MCRs may be less aggressive and less aware of pure Web based retailers. These consumers may also have less trust in pure Internet retailers because of the absence of a local presence. This difference in consumer behavior provides the multi-channel retailer with the opportunity to coordinate its pricing strategies across its various operations and avoid internal price competition.
The conclusion we draw is that if the pure online retail format largely fails, and there has been ample evidence suggesting this possibility, our data suggest that consumers will not realize the benefits from the economies inherent in the operation of the Internet. MCRs would come to dominate Web based sales and their policies and interests would cause pricing policies to reflect the costs and promotional programs set forth in their traditional stores. It will be important to assess whether this pattern of market separation is prevalent in other Web markets 10 substantiate this view.
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