Transcript Internet Search

Internet Price Search
Background Information
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Dramatic collapse in the stock prices of
leading E-retailers.
Etoys, an online shop selling toys, had a
market capitalization:
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Year 1999: $10 billion
Year 2000: only $4 million
on the verge of bankruptcy
Reasons for the collapse
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High fixed costs
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Low price-margin
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advertising
website development
not just one time set up costs
internet search technologies create Bertrand-like
competition
Price searching business is becoming more
and more important as the E-retailing
business is more and more popular
Price Search
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Price Search Engine
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websites specified in finding out the lowest
price offered in the internet by E-retailers
will direct you to the website of retailers
Price Search
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2 kinds of search engine:
Database-based
Shopbot-technology-based
Price Search
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Database-based:
Firms directly enter prices and item
descriptions into the database
Use a web-based interface to enter and
change the price
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Pricewatch.com, Shopper.com
Price Search
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Prices listed can be changed
Firms can complete with each other
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Shopper.com – change twice a day
Pricewatch.com – unlimited times a day
PRICE WATCH
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Pricewatch.com
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®
Database-based facility
specified in searching computers components
E.g memory, CPUs, motherboard...etc
Firms listed: mainly small firms
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large number of small business in this segment
without advertising or web development costs
the major channel to reach customers: Pricewatch
Search Engine Revenue
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E.g Shopper.com
$1000 one-time, non-refundable fee
Additional $100 at the beginning of each
month
Firms receive over 250 qualified leads:
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Qualified lead – a consumer ‘clicks-through’ from
the Shopper.com site to a firm’s site
$0.5 per lead for first 50,000 leads
$0.6 per lead for each additional
PRICE WATCH
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®
ResellerRatings.com
Evaluate companies who sell computer
products
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enable people to post feedback on
companies
STOP SEARCHING!
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Possibility of improper usage
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“Search engine spamming”
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“Child care” in web site selling children clothing
Use of “playboy”, “playmate” in a website and had
been sued by Playboy
Bargain Finder by Brian Krulwich
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Search online CD stores for the best price
Over 100,000 users in the first 2 months
3 out of 8 online CD stores the program searched
decided to prevent its search on their web sites
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a highly scalable information retrieval
system
advanced parallel search technologies
Offer instant product comparison
User link to merchant’s “buy” page for easy
purchasing.
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Pricing strategy
Commission model
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charge the sellers a commission of 2%- 5% of
each sale
Sponsor model
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charge the sellers a certain amount of ad fee
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On one hand,
Merchants are willing to be “comparisonshopped” because the Web traffic they get is
motivated to buy.
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On the other hand,
Retailers never like to be side by side with
their competitors
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want to build brand on their own
Empirical Studies: Data
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Price data: hourly data of certain preselected products from Pricewatch.com
Sales data: from one internet retailer
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Little advertising
Most traffic is from Pricewatch
Other data: ranking of firms lowest
price
Empirical Results
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Extremely high elasticity in demand
Negative cross-price elasticity
Empirical Results
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Prices are only about 2% above marginal cost
 Bertrand competition
 even efficient, budget-conscious retailers that did
not advertise could hardly survive
Cross-price elasticity of demand for a higher quality
product with respect to the price of low-quality
product
Empirical Results
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Given the limited capabilities of search engine,
consumers’ only option is to first use the price search
engine to get a list of the websites offering the
lowest price for any memory module,
and then to follow some hyperlinks provided to find
the price of the product that best fits their
preferences.
Obfuscation – Bait-and-switch
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“Bait-and-switch”
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offering a low quality product at a very
low price to attract customers
and then try to convince them to pay extra
to get another product of higher quality in
the website
Obfuscation – Bait-and-switch
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Higher quality product with higher price are
advertised on the websites
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Better warranty and return policies.
Eg, CPU without fans VS CPU with fans
Search Engine Revenue
Paradox
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Revenue of Search Engine
Retailer’s side: membership fee, referral
fee
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E.g. Yahoo! Shopping: 2% gross profit
Consumer’s side: membership fee
Search Engine Revenue
Paradox
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Retailer’s Side
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Bertrand-like competition
making no profit
will not pay much to be listed
Consumer’s Side
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no price dispersion
unwilling to pay for the information
How do E-retailers survive?
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Limitation of search engine
One cannot ask a search engine to find
“decent-quality memory modules sold with
reasonable shipping, return, warranty and
other terms”
How do E-retailers survive?
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Cheating!!!
Obfuscation
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make it difficult for consumers to compare
prices
increase search cost
Obfuscation – Mattress Case
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Search and Obfuscation do not start with the internet
Phone – an effective method for comparing prices
Mattress case:
Retailers use different model names to hinder price
comparison
 Only 2 out of 44 have same model names
Obfuscation – Hidden cost
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Offering a low price with unreasonable shipping
and handling fees
 Unattractive contractual terms:
 Consumers: return shipping and 15-20%
restocking fee on all returns. (Include
defective product)
 very short warranty period
Now: give a range or put “and up” after the
number
Obfuscation
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For shopbot-technology
More prone to obfuscation
Incorrect prices and matches
E.g: Yahoo! Shopping
 “128MB PC100 SDRAM”
 5 lowest prices: $0!!
 Incorrect memory module
Obfuscation
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Some firms state that offered prices are not
available through the website and require
consumer to call on the phone.
While other retailers state that the prices on
Pricewatch are only available through the website
and do not apply to phone orders.
Search and Obfuscation
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A game of balance of power
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Improvement in information technology
decrease or sometimes increase the search
costs
Search engine case:
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Consumers: wish to lower search cost
Retailers: wish to raise search cost
Part1-2: Customer loyalty
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Why is Customer loyalty
an essential asset of e-vendors?
What is customer loyalty?
Customer loyalty describes the tendency of a
customer to choose one business or product over
another for a particular need.
Note: satisfaction does NOT equal loyalty
Why is Customer loyalty
an essential asset of e-vendors
The challenge on Internet age:
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Instantaneous access to large amounts of
information
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Quickly compare competing products and services
from a variety of sellers
High cost of attracting new customers on the
Internet
The relative difficulty in retaining current customers
What loyal customers will do?
loyal customers
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are typically willing to pay a higher price
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are more understanding when something goes wrong
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are easier to satisfy because the vendor knows better what
the customers’ expectations are
are more inclined to recommend the firm to other
customers
Customer loyalty program
The purpose of customer loyalty programs is to reward
customers for frequent purchases, and thereby
encourage them to keep shopping within one vendor
rather than shifting to others
Types of rewards programs
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Offering the most steady customers a discount
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Customized services
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Frequent-purchaser program
----linear rewards scheme
----non linear rewards scheme
Successful loyalty programs
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Cash value
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Choice of redemption option
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Aspirational value:
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Relevance
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convenience
Part3 Price Matching
Is price matching anti or procompetition online?
Two concepts
about price matching
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Restrictive concept
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the store refunds the difference in price
only
General concept
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the restrictive concept + price beating
strategy
Traditional view
ANTI-COMPETITION
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Price matching facilitates tacit collusion
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Profit decrease for each firm’s
Diminishing firms’ incentives to cut prices
Raising equilibrium prices
Example : Airline industry
Other voices
PRO-COMPETITION
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Price beating policies
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Corts, K. (1995)
Profitable price cutting
Monopoly equilibrium unsustainable
Hassle cost
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Hviid, M. and G. Shaffer (1999)
Incurred from refund request
Consumers still go to lower price even hassle
costs are small
The online world
not that easy
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Numerous incumbents
low entry costs v.s huge sunk costs for
new entrant
Transparent prices from shopbot
Conclusion
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Price matching policy may work with
oligoplist to soft competition
But not with dozens of rival in the
intricate online world
Possible Scenario
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Bertrand-like competition presently
High oligopoly price afterward
The threat of new entry and
competition from offline vendors
prevent market power abuse
Conclusion
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While the internet clearly facilitates
search, it also allows firms to adopt a
number of strategies that make search
more difficult.