Frictionless Commerce? A Comparison of Internet and Conventional Retailers

There have been many claims that the Internet represents a new nearly "frictionless market." Our research empirically analyzes the characteristics of the Internet as a channel for two categories of homogeneous products-books and CDs. Using a data set of over 8,500 price observations collected over a period of 15 months, we compare pricing behavior at 41 Internet and conventional retail outlets. It is found that prices on the Internet are 9-16% lower than prices in conventional outlets, depending on whether taxes, shipping, and shopping costs are included in the price. Additionally, it is found that that Internet retailers’ price adjustments over time are up to 100 times smaller than conventional retailers’ price adjustments-presumably reflecting lower menu costs in Internet channels. Also found that that levels of price dispersion depend importantly on the measures employed. When comparing the prices posted by different Internet retailers, substantial dispersion is found. Internet retailer prices differ by an average of 33% for books and 25% for CDs. However, when these prices are weighed by proxies for market share, it is found that dispersion is lower in Internet channels than in conventional channels, reflecting the dominance of certain heavily branded retailers.