Internet brand leaders dominate low price competitors, MIT study shows

June 15, 2000

LINTHICUM, MD, June 19 Although the Internet is popularly perceived as a near perfect market where customers are fully informed and buy at the best price, branding and other factors have made leaders out of companies that don¹t charge the lowest prices, according to a study published in a journal of the Institute for Operations Research and the Management Sciences (INFORMS).

The study, ³Frictionless Commerce? A Comparison of Internet and Conventional Retailers² is written by Erik Brynjolfsson and Michael D. Smith of the Center for eBusiness at the MIT Sloan School of Management. It appears in vol. 46, no. 4 of Management Science, an INFORMS publication. The authors used the techniques of operations research and management science to reach their conclusions.

The authors studied data for book and CD sales both online and in conventional stores. Although online customers should be able to use search engines to buy at the lowest price, the authors found that the leading online retailers were not the least expensive.

In books, as expected, they found that Amazon.com is the undisputed leader in online book sales. Yet three of the eight online book retailers examined in the study have lower prices on average than Amazon.com. One retailer¹s prices averaged $1.60 less than those of Amazon.com. Books.com, subsequently purchased by Barnes and Noble, showed lower prices than Amazon.com 99% of the time.

A similar situation holds for CD¹s, the authors found. Amazon.com¹s CD sales surpassed the sales of the previous sales leader, CDNOW, only three months after Amazon entered the market. Yet both Amazon.com and CDNOW have prices that average approximately $1 more than prices at Newbury Comics and CD Universe, the CD retailers with the lowest prices in the study.

The authors suggest several explanations. They note that consumers may be aware of only one or two Internet retailers for books and CDs and may not seek out better prices among unknown companies. The trust that consumers have for various Internet retailers and the associated value of branding may be another factor.

Online Prices 9-16% Lower

The authors report three major findings about online and conventional retailers in their study.

1. Prices for books and CDs sold on the Internet, as compared to items sold at stores, average 9 - 16% less, depending on whether shipping, handling, and tax are included. The mean price for books was $2.16 less and $2.58 less for CDs.

2. Internet retailers change prices in smaller increments than conventional retailers. The smallest observed price change on the Internet was 1 cent while the smallest observed price change by a conventional retailer was 35 cents.

3. There are substantial and systematic differences in prices across retailers on the Internet. Prices posted on the Internet differ by an average of 33% for books and 25% for CDs. At the same time as noted above the dispersion of prices weighted by retailer popularity reveals that Internet markets are highly concentrated, but the retailers with the lowest prices do not receive the most sales.

Data

The authors gathered price data, product characteristics, and retailer characteristics for CDs and books sold through Internet and conventional retail outlets. The data includes over 8,500 individual price observations collected from February 1998 to May 1999.

Books and CDs were chosen for the study because the physical products themselves are homogeneous: Books can be uniquely identified by their ISBN number, and CDs can be uniquely identified by a record label catalog number. This enabled easier comparison of prices across channels. Books and CDs are also useful because each is sold through numerous Internet and conventional outlets, facilitating comparison across a wide variety of firms. Additional information is available online at http://www.informs.org/Press and http://ebusiness.mit.edu/erik
-end-
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 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. The INFORMS website is at http://ebusiness.mit.edu/erik .

Barry List
Director of Public Relations
Institute for Operations Research and the Management Sciences (INFORMS)
901 Elkridge Landing Road, Linthicum, MD 21090-2909
http://www.informs.org/Press/
410-691-7852; FAX 410-684-2963 Pager 410-368-6580 Home 410-358-7162
barry.list@informs.org


Institute for Operations Research and the Management Sciences

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