Media Briefings

PRICES ON THE INTERNET: More flexible than in conventional stores but still not fully flexible

  • Published Date: March 2015

The internet has changed our shopping habits, but it hasn't created the near-perfect price flexibility that classical economic models would predict or that consumers might prefer. That is the central finding of new research into internet pricing trends from Sasha Talavera and colleagues to be presented at the Royal Economic Society’s 2015 annual conference.

Their study finds that online prices (especially prices with a large number of clicks) are more flexible than prices in conventional stores. Yet the difference in properties of online and offline prices is quantitative rather than qualitative.

The authors investigate price movements for more than 50,000 goods in 22 broadly defined consumer categories in the United States and the UK between May 2010 and February 2012. Comparing the behaviour of these prices to the prices of similar goods in conventional brick-and-mortar stores, they find that:

• Online prices are sticky: prices stay the same in online markets for about 7 to 20 weeks – that's shorter than in brick-and-mortar stores, but online prices clearly do not adjust every instant.

• Sellers change prices independently of each other: there is low synchronisation of price changes by a seller across goods, and for a good across sellers.

• It's still worth shopping around: the gap between low and high prices in online markets is similar to, if not larger than, price dispersion in brick-and-mortar stores.

The research may be bad news for consumers who expect a 'race to the bottom' in online pricing that removes the need to check more than one retailer: the authors conclude that even if e-commerce grows to dominate the retail sector, price stickiness is unlikely to disappear. But it also has lessons for policy-makers, who cannot disregard the effect of e-commerce on inflation, as pricing in online markets does differ from that in brick-and-mortar stores.

More…

Today, it’s hard to imagine the world without the internet. Apart from changing the way people communicate, connect or acquire information, the internet has also changed our shopping habits: with just a few clicks, one can buy almost anything online and get it delivered promptly!

The internet also offers seemingly limitless opportunities to the retail sector by enabling sellers to collect and process massive amounts of data to tailor prices and product characteristics to specific whims of consumers and ever-changing economic conditions. Prices for goods and services sold online should approach – if not now, then eventually – the flexibility of auction or stock prices.

Indeed, the internet makes it trivial to compare prices across sellers, the cost of posting a new price is minimal, the best price is just a few clicks away, the physical location of online sellers is largely irrelevant, and numerous services advise online shoppers on best time and location of the purchase. Should one expect extinction of sticky prices then?

This study provides new evidence on the nature and sources of price dispersion and frictions in price adjustment using data from a leading online shopping platform on daily prices for more than 50,000 goods in 22 broadly defined consumer categories in the United States and the UK between May 2010 and February 2012. It documents properties of online prices (frequency of price adjustment, price synchronisation across sellers and goods, size of price changes) and compares the findings to results reported for price data from conventional, brick-and-mortar stores.

The researchers find that despite small physical costs of price adjustment, the duration of price spells in online markets is about 7 to 20 weeks, depending on the treatment of sales. While this duration is considerably shorter than the duration typically reported for prices in brick-and-mortar stores, online prices clearly do not adjust every instant.

They also observe a low synchronisation of price changes by a seller across goods and for a good across sellers: by and large, price changes are independent from each other. Furthermore, they observe ubiquitous price dispersion in online markets, which is similar to, if not larger than, price dispersion in brick-and-mortar stores.

To shed new light on the use of dynamic pricing – instantaneous price adjustment in response to a change in demand or supply conditions – by online retailers, the study considers different ways through which it can affect price flexibility.

First, it looks at the reaction of prices to low-frequency anticipated variation in demand due to holiday sales such as Black Friday and Cyber Monday in the United States or Boxing Day in the UK and finds that the number of clicks goes up and the average price goes down during the holiday sales.

Second, there is a large high-frequency variation in demand, proxied by the number of clicks, over days of the week or month. For example, the number of clicks on Mondays is substantially larger than on Saturdays.

In summary, the main result is that online prices (especially prices with a large number of clicks) are more flexible than prices in conventional stores. Yet, the difference in properties of online and offline prices is quantitative rather than qualitative. That is, despite the power of the internet, the behaviour of online prices is consistent with smaller but still considerable frictions, thus questioning the validity of popular theories of sticky prices and, more generally, price setting. By some metrics, prices of goods sold online could be as imperfect as in regular markets.

These findings have a number of implications:

• Even if e-commerce grows to dominate the retail sector, price stickiness is unlikely to disappear because it does not seem to be determined exclusively by search costs and/or physical costs of changing a price sticker.

• Policy-makers should not disregard the effect of e-commerce on properties of the aggregate price level and inflation as pricing in online markets does differ from that in brick-and-mortar stores.

• Macroeconomists should put more effort into developing theoretical models with alternative mechanisms that generate price stickiness, dispersion, and other imperfections.

ENDS


Sasha Talavera
University of Sheffield
oleksandr.talavera@gmail.com