The Economics of the Internet and E-commerce: Volume 11

In this chapter, we review research on the Internet's impact on ‘horizontal’ and ‘vertical’ competition. First, focusing on horizontal competition, we examine theory and empirical evidence on the extent to which the Internet increases market efficiency, as well as possible underlying explanations for the observed empirical patterns. Second, turning to vertical competition among market players within the value chain, we analyze the extent to which the Internet leads to ‘disintermediation'’ ‘reintermediation’, or other forms of value chain reconfiguration. We find little support for early predictions that the Internet will have a dramatic impact on horizontal and vertical competition.

In this paper, we first develop a game theoretic model of price competition between a pure play e-tailer and a bricks-and-clicks e-tailer. We show that in general, the pure play e-tailer has a lower equilibrium price. We then develop a simultaneous equation model of e-tailer price and traffic and estimate this model using data collected from 905 e-tailers across eight product categories. The empirical results show that after controlling for the effects of other variables, prices at pure play e-tailers are generally lower. E-tailers with high traffic do not always command higher prices. E-tailers with high level of reliability, shopping convenience, and deep information, generally do not generate high web traffic and do not enjoy high prices. However, trust enhances e-tailer traffic and early online entry is associated with both high e-tailer traffic and high prices.

This paper uses two datasets to examine price dispersion spanning a 24-year period. The first dataset permits us to compare levels of retail price dispersion in 1976 and 2000, while the second allows for a comparison of retail dispersion in 1976 with dispersion in e-tail markets in 2000. Our results indicate that price dispersion in 2000 for both retail and e-tail markets is comparable to that observed in 1976 retail markets. This suggests that, for the products in our sample, the Information Age has done little to reduce price dispersion in retail or e-tail markets.

This paper presents a framework to analyze the potential changes in transaction costs due to the introduction of e-commerce on transactions between businesses. It then illustrates and applies this framework using internal data from an Internet-based firm to measure process improvements, marketplace benefits, and motivation costs. We find that process improvements and marketplace benefits are potentially large, while little evidence exists of increases in motivation costs. Finally, we use the framework to help discuss why valuations of Internet companies were so high at the end of 1999 and why they have declined so precipitously since then.

One of the earliest and best known Internet reputation systems is run by eBay, which gathers comments from buyers and sellers about each other after each transaction. Examination of a large data set from 1999 reveals several interesting features. First, despite incentives to free ride, feedback was provided more than half the time. Second, well beyond reasonable expectation, it was almost always positive. Third, reputation profiles were predictive of future performance, though eBay's net feedback statistic is far from the best predictor available. Fourth, there was a high correlation between buyer and seller feedback, suggesting that the players reciprocate and retaliate.

Advances in computers and telecommunications and the development of the Internet have been applied to develop new transaction technologies that lower transaction costs. By lowering transaction costs, these changes in transaction technology make possible transaction innovation, that is, the development of new types of market transactions. Transaction innovation changes not only business methods and organizational design, but the content of transactions and the way that markets are organized. I consider the impact of transaction innovation on the role of the firm in various economic activities including market clearing, auction design, price adjustment, quality certification, and agency.

In private values settings, the Wickrey-Clarke-Groves (VCG) mechanism leads to efficient auction outcomes, while the theoretical properties of the Simultaneous Ascending (SA) auction are not well understood. This leads us to compare the properties of an SA and a VCG auction in an experimental setting with private values for multiple objects having complementarities. Statistically, we find little to distinguish the two auctions with both auction forms achieving more than 98% efficiency and extracting roughly 95% of the available surplus. Finally, in contrast to experimental results in single object VCG settings, the theoretical prediction of demand revelation in the multiple object VCG auction is largely supported in our experiments.

This paper estimates demand for Internet portals using a clickstream data panel of 2654 users. It shows that familiar econometric methodologies used to study grocery store scanner data can be applied to analyze advertising-supported Internet markets using clickstream data. In particular, it applies the methodology of Guadagni and Little (1983) to better understand households' Internet portal choices. The methodology has reasonable out of sample predictive power and can be used to simulate changes in company strategy.

We examine consumer use of the Internet as a product information gathering tool (distinct from the use of it for transaction completion). We use data from surveys to estimate how consumer use of different marketing information channels (Internet, print, catalog, broadcast) affects the choice of channel for purchasing the good (Internet, retail, direct mail). Across many product categories, we find that Internet product information gathering increases the likeliness of purchase in other channels. Similar effects from other informational channels are not observed. Our findings have implications for measuring the retail impact of the Internet, the assumption of better informed consumers, the competitiveness of off-line, as well as online markets, and the management of “channel conflict.”

With the astounding growth of traffic carried by the Internet in recent years, congestion is becoming an increasing problem. Real-time and mission-critical traffic require levels of service quality exceeding the best-effort level currently provided. Intserv and Diffserv service models have been developed to provide multiple levels of quality of service (QoS) throughout the Internet. We develop a generic economic model of network QoS to address how these levels of QoS should be specified and how they should be allocated. The pricing of marketable tokens for QoS access and its impact on efficiency are analyzed.