Commentators have observed that the ease of monitoring competitors
on the Internet may allow Internet retailers to engage in non-competitive
pricing. Using data on the daily prices of 399 books at 26 online bookstores
between August 1999 and January 2000, we investigate firm pricing
behavior in the online book market. Although sales in the Internet channel
were growing very rapidly at the time, we find that relative prices
differed across the three categories of bookstores (big three, active fringe,
and inactive fringe), and these differences were remarkably stable over
time. We present a simple model in which cross-channel competition and
differentially informed consumers lead to the observed (static) pricing patterns.
Although relative prices were stable, prices did change and were
on average increasing over time. We document the dynamic strategic interaction
across firm categories and across individual firms. Ten pairs of
firms involving seven individual firms changed prices in the same direction
on the same book within three days in an (one standard deviation)
above average number of cases and respond more than 25 percent of the
time to competitors’ price changes. Given the behavior of these firms and
the large market shares held by the top three firms, we formally test a
number of oligopoly and non-oligopoly explanations for the observed price
changes. We find that the observed patterns were not consistent with the
predictions of oligopoly pricing in the Haltiwanger and Harrington (1991)
model or with other explanations such as customer loyalty, inventory considerations
or changes in elasticity of demand associated with holidays.
We conjecture that the observed cases of parallel pricing were largely attributable
to experimentation on the part of the initiator and learning or
competitive response on the part of the responder.