Internet Likely To Spur Price Wars, Study Shows

January 14, 1998

BALTIMORE, January 14 - The Internet and other electronic marketplaces can hurt businesses by stiffly increasing price competition, according to a study published this month in a journal of the Institute for Operations Research and the Management Sciences (INFORMS). Price wars among sellers, however, will benefit buyers by reducing costs when shopping electronically for consumer or business-to-business products.

Electronic marketplaces - including Internet-based search engines, electronic storefronts, and airline reservation systems - in the long run will favor buyers over sellers, writes Dr. Yannis Bakos, a professor at the Graduate School of Management, University of California, Irvine and the Stern School of Business, New York University. As high-speed digital telecommunications and the Internet make electronic marketplaces available to hundreds of thousands of businesses and millions of individual consumers, the cost of acquiring information about seller prices and product offerings goes down. But for those on the selling end, these systems reduce the ability to charge high prices and spur heightened competition among businesses trying to win over potential customers.

According to Professor Bakos, Information Technology helps create efficient electronic markets, such as on-line auctions or electronic job banks, and thus promotes the "friction-free capitalism" espoused by many pundits of the information age. Furthermore, by reducing buyers' search costs, these electronic marketplaces produce more demanding customers who are less willing to compromise on their preferred product features, he says.

Although in the long run it may be inevitable that electronic markets will benefit buyers more than sellers, Professor Bakos finds that with proper strategic choices, sellers can counter this threat. In particular, sellers should introduce systems that focus on comparing product features rather than prices, and should increase the differentiation of their products. Professor Bakos' conclusions appear in an article, "Reducing Buyer Searcher Costs: Implications for Electronic Marketplaces" in the current issue of Management Science, an INFORMS publication.

The Institute for Operations Research and the Management Sciences (INFORMS) is an international scientific society with 12,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work primarily in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, the stock market, and telecommunications.

Institute for Operations Research and the Management Sciences

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