Organizing the New Industrial Economy: Volume 12

The Internet has enabled consumers to act as their own travel agents and to verify independently the accuracy of the information provided by airlines through the CRSs and travel agents. As a result, the relationships between consumers and the suppliers of air-travel information have been radically altered, and we document these changes. We identify the relevant market for air-travel information, which includes CRSs, online travel agencies, and the websites and call centers of individual carriers. We determine market concentration and market shares using the Herfindhal-Hirschman Index. Based on our analysis, we argue that there is no longer any need to regulate independent CRSs. However, airlines that own CRSs continue to have an incentive to withdraw their flight and fare information from rival CRSs and, to prevent this from happening, the mandatory participation rule adopted in 1992 should be maintained.

Our study provides an industrial census of the dispersion of Internet technology to commercial establishments in the United States. We distinguish between participation, that is, use of the Internet because it is necessary for all business (e.g. email and browsing) and enhancement, that is, adoption of Internet technology to enhance computing processes for competitive advantage (e.g. electronic commerce).

We find that participation and enhancement display contrasting patterns of dispersion. In a majority of industries, participation has approached saturation levels, while enhancement occurs at lower rates with dispersion reflecting long standing industrial differences in use of computing. In general, lead adopters were drawn from a variety of industries, including many of the same industries that lead adoption of other generations of information technologies; however, the appearance of water transportation and warehousing as leading industries in Internet adoption shows that the Internet influenced establishments where logistical processes played a key role. We find large differences across industries and we caution against inferring too much from the experience in manufacturing despite the widespread availability of data in that sector.

Many Internet retailers must raise margins in the future if they are to survive. This raises the important issues of whether they will be able to raise margins as well as how valuation estimates made today should evaluate projected changes to margins in the future. In this paper, we describe retail strategies of pricing for market share in growing markets and show how measures of the price elasticity of demand facing retailers in the current year can be combined with standard accounting variables to inform calculations about future margins. Our analysis suggests that the capital market projects greater future margin improvements for Amazon.com than for BN.com and that this may be due to Amazon benefiting from network effects.

We investigate how online price dispersion has evolved since the bursting of the Internet bubble by comparing price dispersion levels in years 2000, 2001, and 2003 and between multi-channel and pure play e-tailers. The results show that although online price dispersion declined between 2000 and 2001 when there was a shakeout in Internet retailing, it increased from 2001 to 2003, the post bubble period, in particular, for desktop computers, laptop computers, PDAs, electronics and software. The proportion of items for which price dispersion at multi-channel retailers was higher than that at pure play e-tailers, increased steadily during 2000–2003. These findings suggest that online price dispersion is persistent even as Internet markets mature.

This paper provides a comprehensive analysis of online price dispersion in Europe, across a broad range of product categories and countries. Using the dominant European price comparison site we collected firm specific prices, weekly, from seven European countries (Denmark, France, Italy, Netherlands, Spain, Sweden and the United Kingdom) for 31 unique products, falling into five distinct product categories (printers, PDAs, scanners, games consoles, computer games and music), over the nine-month period October 2001 to June 2002. The resulting data set comprises over 17,000 individual price observations.

Using a number of alternative measures of price dispersion we find significant differences in the degree of price dispersion observed in online markets, both between countries and across product categories. We consider alternative explanations for online price dispersion and analyze their significance in explaining the observed differences.

We study how price dispersion varies with product characteristics at a popular online price comparison site – Shopper.com. Our primary finding suggests that price dispersion in online markets varies with product characteristics and firm behavior. We also find evidence that the level of dispersion varies with the percent of firms listing price information in multiple categories. When the percent of firms listing prices in multiple categories is relatively high (low), price dispersion is low (high).

Livingston (2002) shows that bidders in Internet auctions are easily convinced of a seller’s trustworthiness: they bid large amounts even if sellers have barely established a reputation for performance, suggesting that they believe that typical sellers usually perform. This study reinforces this conclusion by looking at how bidders choose which auction to bid in when there are several that are selling the same item. The analysis shows that so long as a seller has some history, bidders consider bidding in the seller’s auction. They then choose auctions that offer the best chance to obtain the good at the lowest price.

This paper studies product adoption as modeled by Katz and Shapiro (1986) in an experimental setting. Two sellers offer competing, incompatible technologies and two groups of buyers make purchase decisions sequentially in a two-stage game of complete information. Value to a buyer from purchasing a technology depends on the total number of buyers of that technology (installed base). There is mixed evidence that the results are qualitatively consistent with equilibrium predictions laid out in theory. Buyers of technology display behavior close to equilibrium predictions. However, the sellers in the laboratory do not exploit their installed bases significantly.

This paper considers firms’ incentive to preserve compatibility between product generations in a duopoly setting. A firm may or may not maintain backward compatibility depending on its first period market share. Firms’ compatibility choices consequently will affect their pricing behaviors. Specifically, it is shown that under certain conditions both firms will preserve compatibility and act as local monopolist in the second period. Hence, backward compatibility becomes a tool for firms to relax second period price competition.

We examine a two-period, homogeneous product duopoly model. Consumers choose the supplier that demands the lowest two-part tariff payment. When per unit rates are given, firms’ competition in fixed fees leads to an endogenous segmentation of the market, with positive profit for both firms and consumers self-selecting according to their usage levels. Consumers’ usage levels vary between periods but switching suppliers is costly. Examining various possibilities (including price discrimination between old and new customers) reveals that switching affects the two suppliers asymmetrically, as the average usage level of a firm’s clientele changes.