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Understanding Digital Markets: Review and Assessment
Any type of content formally published in an academic journal, usually following a peer-review process.
posted on 01.01.1999by Michael Smith, Joseph Bailey, Erik Brynjolfsson
As the Internet develops into a robust channel for commerce, it will be important to understand
the characteristics of electronic markets. Businesses, consumers, government regulators, and
academic researchers face a variety of questions when analyzing these nascent markets. Will
electronic markets have less friction than comparable conventional markets? What factors lead to
dispersion in Internet prices? What are the major electronic commerce developments to watch in
the coming years? This paper addresses these questions by reviewing current academic research,
discussing the implications of this research, and proposing areas for future study.
We review evidence that Internet markets are more efficient than conventional markets with
respect to price levels, menu costs, and price elasticity. However, several studies find substantial
and persistent dispersion in prices on the Internet. This price dispersion may be explained, in
part, by heterogeneity in retailer-specific factors such as trust and awareness. In addition, we
note that Internet markets are still in an early stage of development and may change dramatically
in the coming years with the development of cross-channel sales strategies, infomediaries and
shopbots, improved supply chain management, and new information markets.