Social network externalities and price dispersion in online markets

Edgardo Arturo Ayala Gaytán

doi:10.29105/ensayos28.2-1

Autores/as

Edgardo Arturo Ayala Gaytán

DOI:

https://doi.org/10.29105/ensayos28.2-1

Palabras clave:

externalidades de redes, dispersión de precios, mercados en línea, referencias de palabra.

Resumen

Ample empirical studies in the e-commerce literature have documented that the price dispersion in online markets is 1) as large as that in offline markets, 2) persistent across time, and 3) only partially explained by observed eretailers’ attributes. Buying on the internet market is risky to consumers. First of all, consumers and the products they purchase are separated in time. There is a delay in time between the time consumers pay and the time they receive the orders. Second, consumers and the products they purchase are separated in space. Consumers cannot physically touch or examine the products at the point of purchase. As such, online markets involve an adoption process based on the interaction of consumers’ experiences in the form of references, recommendations, word of mouth, etc. The social network externalities introduced by the interaction of consumer’s experiences reduces the risk of seller choice and allows some sellers to charge higher prices for even homogeneous products. This research aims to study online market price dispersion from the social network externalities perspective. Our model posits that consumers are risk averse and assess the risk of having a satisfactory transaction from a seller based on the two dimensions of the seller’s social network externalities: quantity externality (i.e., the size of the seller’s social network) and quality externality (i.e., the satisfactory transaction probability of the seller’s social network). We further investigate the moderating effect of product value for consumers on the impact of social network externality on online market price dispersion. Our model yields several important propositions which we empirically test using data sets collected from eBay. We found that 1) both quantity externality and quality externality of social network are salient in driving online price dispersion, and 2) the salience of social network externality is stronger for purchase behavior in higher value product categories.

Descargas

Los datos de descargas todavía no están disponibles.

Citas

Avery, C.; P. Resnick; and R. Zeckhauser (2002).”The market for evaluations”. American Economic Review. Vol. 89, Num. 3, pp. 564-585. DOI: https://doi.org/10.1257/aer.89.3.564

Bailey, J. P. (1998). ”Electronic commerce: prices and consumer issues for three products: books, compact discs and software”. Working Paper OCDE/GD. Vol. 98, Num. 4.

Bakos, J. Y. (1997). ”Reducing buyer search costs: implications for electronic marketplaces”. Management Science. Vol.43, Num. 12, pp. 1676-1692. DOI: https://doi.org/10.1287/mnsc.43.12.1676

Banerjee, A. V. (1992). ”A simple model of herd behavior”. The Quarterly Journal of Economics. Vol. 107, Num. 3, pp. 797-817. DOI: https://doi.org/10.2307/2118364

_________(1993). ”The economics of rumors”. The Review of Economic Studies. Vol. 60, Num. 2, pp. 309-327. DOI: https://doi.org/10.2307/2298059

Bass, F. M. (1969). ”A new product growth model for consumer durables”. Management Science. Vol.15, Num. 1, pp. 215-227. DOI: https://doi.org/10.1287/mnsc.15.5.215

________(1980). ”The relationship between diffusion rates, experience curves, and demand elasticities for consumer durable technological innovations”. The Journal of Business. Vol.53, Num. 3, pp. 51-67. DOI: https://doi.org/10.1086/296099

Brown, J. R.; and A. Goolsbee (2002). ”Does the internet make markets more competitive? evidence from the life insurance industry”. Journal of Political Economy. Vol. 110, Num. 3, pp. 481-507. DOI: https://doi.org/10.1086/339714

Brynjolfsson, E. and C. F. Kemerer (1996). ”Network externalities in microcomputer software: an econometric analysis of the spreadsheet market”. Management Science. Vol. 42, Num. 12 , pp. 1627-1647. DOI: https://doi.org/10.1287/mnsc.42.12.1627

Brynjolfsson, E.; and M. Smith (2000). ”Frictionless commerce? a comparison of internet and conventional retailers”. Management Science. Vol. 46, Num. 4, pp. 563-585. DOI: https://doi.org/10.1287/mnsc.46.4.563.12061

________(2001). ”The great equalizer? consumer choice behavior at internet shopbots”. Sloan Working Paper 4208-01, eBusiness@MIT Working Paper 137, October.

Butters (1977). ”Equilibrium distribution of sales and advertising prices”. Review of Economic Studies. Vol. 44, Num. 3, pp. 465-491. DOI: https://doi.org/10.2307/2296902

Clarke, F.; M. Darrough; and J. Heineke (1982). ”Optimal pricing policy in the presence of experience effects”. The Journal of Business. Vol.55, Num. 4, pp. 517-530. DOI: https://doi.org/10.1086/296179

Clay, K.; R. Krishnan; and E. Wolff (2001). ”Prices and price dispersion on the web: evidence from the online book industry”. The Journal of Industrial Economics. Vol. 49, Num. 4, pp. 521-539. DOI: https://doi.org/10.1111/1467-6451.00161

Clay, K.; R. Krishnan; E. Wolff; and D. Fernandes (2002). ”Retailers strategies on the web: price and non-price competition in the online book industry”. The Journal of Industrial Economics. Vol. 50, Num. 3, pp. 351-367. DOI: https://doi.org/10.1111/1467-6451.00181

Clemons, E. K.; I. Hann; and L. M. Hitt (2002). ”Price dispersion and differentiation in online travel: an empirical investigation”. Management Science. Vol. 48, Num. 4, pp. 534-549. DOI: https://doi.org/10.1287/mnsc.48.4.534

Dellarocas, C. (2003). ”The digitization of word of mouth: promise and challenges of online feedback mechanisms”. Management Science. Vol. 49, Num 10, pp. 1407-1424. DOI: https://doi.org/10.1287/mnsc.49.10.1407.17308

Degeratu, A.; A. Rangaswamy; and J. Wu (2000). ”Consumer choice behavior online and traditional supermarkets: the effect of brand name, price and other search attributes”. International Journal of Research in Marketing. Vol. 17, pp. 55-78. DOI: https://doi.org/10.1016/S0167-8116(00)00005-7

Economides, N. (1993). ”Network economics with application to finance”. Financial Markets, Institutions & Instruments. Vol. 2, Num 5, pp.89-97.

_________(1996). ”The economics of networks”. International Journal of Industrial Organization. Vol. 14, pp. 673-699. DOI: https://doi.org/10.1016/0167-7187(96)01015-6

Economides, N.; and A. Siow (1988). ”The division of the market is limited by the extent of liquidity (spatial competition with externalities)”. American Economic Review. Vol. 78, Num.1, pp. 108-121.

Goolsbee, A.; and P. J. Klenow (1999). ”Evidence on learning and network externalities in the diffusion of home computers”. NBER Working Paper 7329. DOI: https://doi.org/10.3386/w7329

Goolsbee, A.; and J. Chevalier (2002). ”Measuring prices and price competition online: Amazon and Barnes and Noble”. NBER Working Paper 9085. DOI: https://doi.org/10.3386/w9085

Häring, J. (2003). ”Different prices for identical products? market efficiency and the virtual location in B2C E-Commerce”. Center for European Economic Research, Discussion Paper No. 03-68.

Katz, M. L.;. and C. Shapiro (1985). ”Network externalities, competition and compatibility”. American Economic Review. Vol. 75, Num. 3, pp. 424-440.

Kennickell, A.; K. and Myron (1997). ”Who uses electronic banking? Results from the 1995 Survey of Consumer Finances”. Proceedings from the Federal Reserve Bank of Chicago.s Annual Conference on Bank Structure and Competition. Chicago: Federal Reserve Bank of Chicago, pp. 56.75.

Lach, S. (2002). ”Existence and persistence of price dispersion: an empirical analysis”. NBER Working Paper 8737. DOI: https://doi.org/10.3386/w8737

Lattin, J. M.; and J. H. Roberts (2000). ”The application of an individual-level diffusion model prior to launch”. Graduate School of Business, Stanford University, Research Paper No. 1663.

Lynch, J. G.; and D. Ariely (2000). ”Wine online: search costs affect competition on price, quality and distribution”. Marketing Science. Vol.19, Num. 1, pp. 83-103. DOI: https://doi.org/10.1287/mksc.19.1.83.15183

Mayzlin, D. (2006). ”Promotional Chat on the Internet”. Marketing Science. Vol. 25, Num. 2, pp. 155-163. DOI: https://doi.org/10.1287/mksc.1050.0137

Oren, S. S.; and R. G. Schwartz (1988). ”Diffusion of new products in risk-sensitive markets”. Journal of Forecasting. Vol. 7, pp. 273-287. DOI: https://doi.org/10.1002/for.3980070407

Pan, X.; B. T. Ratchford; and S. Venkatesh (2001). ”Why aren’t the prices of the same item the same at me.com and you.com?: drivers of price dispersion among e-retailers”. Working Paper, University of Maryland. DOI: https://doi.org/10.2139/ssrn.328820

_________ (2002a). ”Can price dispersion in online markets be explained by differences in e-retailer service quality”. Journal of the Academy of Marketing Science. Vol. 30, Num. 4, pp. 433-445. DOI: https://doi.org/10.1177/009207002236915

_________(2002b). ”Price competition between pure play vs. bricks and clicks e-retailers: analytical model and empirical analysis”. Working Paper, University of Maryland.

Resnick P.; R. and Zeckhauser (2002). ”Trust among strangers in internet transactions: empirical analysis of eBay´s reputation system”. In Baye, M. (ed) (127-157). The Economics of the Internet and E-Commerce. Vol. 11. DOI: https://doi.org/10.1016/S0278-0984(02)11030-3

Roberts, J. H.; and G. L. Urban (1988). ”Modeling multiattribute utility risk, and belief dynamics for new consumer brand choice”. Management Science. Vol. 34, Num. 2, pp. 167-185. DOI: https://doi.org/10.1287/mnsc.34.2.167

Salop, S.; and J. Stiglitz (1977). ”Bargains and ripoffs: a model of monopolistically competitive price dispersion”. The Review of Economic Studies. Vol. 44, Num. 3, pp. 493-510. DOI: https://doi.org/10.2307/2296903

_________(1982). ”The theory of sales: a simple model of equilibrium price dispersion with identical agents”. The American Economic Review. Vol.72, Num. 5, pp. 1121- 1130.

Sathl II, D. (1989). ”Oligopolistic pricing with sequential consumer search”. American Economic Review. Vol. 79, Num. 4, pp. 700-712.

Scholten, P.; and S. A. Smith (2002). ”Price Dispersion Then and Now: evidence From Retail and E-Tail Markets”. In Baye, Michael (ed.). The economics of the internet and e-Commerce (63-88). Vol. 11. DOI: https://doi.org/10.1016/S0278-0984(02)11028-5

Smith, M.; J. Bailey; and E. Brynjolfsson (2001). ”Understanding digital markets: review and assessment”. MIT Sloan School of Management Working Paper 42211-01. DOI: https://doi.org/10.2139/ssrn.290326

Smith, M. (2002). ”The impact of shopbots on electronic markets”. Journal of the Academy of Marketing Science. Vol. 30, Num. 4, pp. 446-454. DOI: https://doi.org/10.1177/009207002236916

Sorensen, A. T. (2000). ”Equilibrium Price Dispersion in Retail Markets for Prescription Drugs”. Journal of Political Economy. Vol. 108, Num. 4, pp. 833-850. DOI: https://doi.org/10.1086/316103

Varian, H. (1980). ”A Model of Sales”. American Economic Review. Vol. 70, pp. 651-659.