Internet Markets
Information Technology has had an unprecedented impact on global economics. It is creating new markets, changing the structure of existing markets, and continuing to impact business and society in ways no one envisioned. Carnegie Mellon researchers led by Michael Smith are studying the impact of these changes on individuals and to society as a whole. Professor Smith was recently recognized with an National Science Foundation CAREER Award for his groundbreaking research in this and other related areas.
Do consumers benefit from electronic marketplaces?
Common wisdom – in fact common sense – would hold that the Internet must be an efficient marketplace: a huge number of choices, easy and quick comparison tools, low infrastructure costs and other factors should mean that electronic markets would result in shoppers always being able to find the lowest prices online, that retailer profit margins would be squeezed toward zero, and that dominant brands would be less dominant: price would rule. Carnegie Mellon researcher Michael Smith has been studying electronic markets, and has found that many of these assumptions are just plain false.
Smith’s studies find, for example, that there is actually more price dispersion on the Internet than one would expect from the proliferation of Internet retailers. Smith’s research also found that while prices on the Internet are 9-16 percent lower than prices in conventional outlets, Internet retailers’ price adjustments over time are up to 100 times smaller than those of conventional retailers. 
Another study of 20,268 customers who use shopbots – automated tools that allow for easy online search of prices and product characteristics – finds that brand, not just price, is an important determinant of consumer choice. So while shopbots may place pressure on retailers to reduce margins, retailers still retain many opportunities to differentiate their products, leverage brand names and set strategic prices that can reduce the effectiveness of shopbots.
So what is so great about the electronic marketplace? In “Consumer Surplus in the Digital Economy: Estimating the Value of increased Product Variety” Smith and his colleagues have empirically found that consumers gain approximately ten times more value from having more product variety online than from the benefit gained from the increased competition and lower prices. Therefore, product variety – not price – is the real driver of consumer value in electronic markets.
|
IMPACT: The Internet’s true value to consumers is not just in lower prices but in the access to increased product variety and the ability to find things online that are not readily available in traditional brick and mortar stores. |
Do online used book markets hurt new book sales?
The market for used goods has existed almost as long as have used goods themselves. But does the existence of used product markets on the Internet – with its dramatically wider selections, lower search costs and lower prices than any brick-and-mortar counterpart – significantly cannibalize new product sales? Carnegie Mellon researchers Michael Smith and Rahul Telang, together with Anindiya Ghose of New York University, empirically analyzed the degree to which used products cannibalized new product sales for books – one of the most prominent used product categories sold online. Their research which was featured in the New York Times (“Reading Between the Lines of Used Book Sales,” July 28, 2005) suggests that not only is cannibalization not a significant issue (only 16 percent of used book sales at Amazon actually cannibalize new book purchases), but that the increase in book readership from Amazon’s used book marketplace actually increases consumer surplus by almost $70 million annually. The increase in consumer surplus, together with an estimated $45 million loss in publisher welfare and a $63 million increase in Amazon’s profits, leads to an increase in welfare to society of about $85 million annually as a direct result of Amazon.com’s used book markets.
