Online-Markets

CONSUMERS BENEFIT FROM ONLINE MARKETS BEING MORE COMPETITIVE THAN THE HIGH STREET

The prices of products sold online are more varied, change more frequently and are more likely to be affected by competitors’ prices compared with rival high-street stores. That is the central finding of research by Oleksandr Talavera and Yuriy Gorodnichenko, to be presented at the Royal Economic Society’s 2013 annual conference.

Their study analyses data from a price comparison website available in both the US and Canada for the period November 2008 to November 2012 and amounting to around 15 million price quotes for more than 140,000 goods. The analysis shows that the ‘pass-through’ of costs in online markets is much quicker than in regular markets. This means that exchange rate fluctuations or changes in the costs of supply are quickly reflected in the prices, often to the benefit of customers.

Online retailers are able to adjust their prices quicker than regular bricks-and-mortar stores because, unlike stores, they don’t have to reprint a menu of prices nor do they have the advantage of a confined geographical location, such as a train station or airport, that allows them to charge over the market rate. The research also finds that other factors play a role in online markets as they do in high-street markets, such as the reputation of sellers as well as whether the products are expensive or luxurious.

The authors say that their findings are good news for the average customer:

‘Our research is consistent with the view that online markets are more efficient in allocating resources and eliminating arbitrage opportunities.

‘To the extent that the future of the retail is going to be similar to current online markets, one may expect improved welfare of consumers.’

The authors also suggest that the study could provide insights for policy:

‘Our analysis could be useful for monetary authorities like the European Central Bank or the Bank of England with legal mandates to maintain stable price levels. In a nutshell, for open economies such as the UK or the US, foreign cost shocks are likely to play an important role in inflationary pressures.

‘The key question is how these cost shocks are translated into changes of domestic prices. Our research shows that this translation is quite large and fast in online markets.’

More…

Product prices online are more varied, change more frequently and are more likely to be affected by competitors compared with rival high-street stores, according to this research.

The research shows that when compared with regular brick-and-mortar store prices, adjusting prices should not cost anything in online markets (indeed, an online store does not need to print a new menu or a new catalogue when it changes its prices) so that prices can fluctuate in an instant in response to shifting demand and supply conditions.

Furthermore, geographical location of consumers and stores is largely irrelevant in e-commerce and therefore administrative borders and similar frictions are likely to play a much more limited role. In this regard, online retail presents a unique laboratory to study what would happen to the allocation of goods and services when key frictions are removed: the cost of adjusting prices and the cost of travel to search for better deals.

Apart from this unique opportunity to shed new light on how markets operate, the authors note that: ‘Internet retail is a rapidly rising segment, which already covers a significant fraction of sales. Little is known about the properties of prices for goods sold online and, as a result, the government and other agencies are likely to have limited information on key online prices statistics, namely sampling frames, frequency of samplings and other key ingredients necessary for calculate price indexes.

This study directly informs policy-makers and statisticians about how to design surveys of online prices and thus correctly measure the level of prices in the economy correctly.

Online retail also presents unique opportunities when prices are compared across countries. The same good can be traded online in different countries and quoted in different currencies. When exchange rates move, buying a good from Canada, for example, may be cheaper than buying the same good from, say, the US.

A key question is how quickly price differentials across countries are eliminated, that is, how quickly movements in the exchange rate are passed through into new prices to ensure that consumers are indifferent between buying goods from Canada and from the US.

The researchers investigate factors affecting pass-through and speed of changes. The size of the pass-through and the speed of price adjustment are systematically associated with the degree of price rigidity, turnover of sellers, returns to search (specifically, the level of prices), synchronisation of price changes, reputation of sellers and the degree of competition as well as dominance of large online sellers.

In this analysis, they use data collected from a price comparison website available both in the US and Canada over four years from November 2008 to November 2012 with about 15 million good-seller-week-country price quotes for more than 140,000 goods.

The main result of the research is that the pass-through in online markets is much larger than in regular markets. This is consistent with the view that online markets are more efficient in allocating resources and eliminating arbitrage opportunities. To the extent that the future of the retail is going to be similar to current online markets, one may expect improved welfare of consumers.

This analysis could be useful for monetary authorities like the European Central Bank or the Bank of England with the legal mandates to maintain stable price levels. In a nutshell, for open economies such as the UK or the US, foreign cost shocks are likely to play an important role in inflationary pressures. The key question is how these cost shocks are translated into changes in domestic prices. The research shows that this translation is quite large and fast in online markets.

ENDS


Notes for editors:

‘Price settings in online markets: Basic facts, international comparisons and cross-border integration’ by Yuriy Gorodnichenko (University of California, Berkeley) and Oleksandr Talavera (University of Sheffield Management School)

Contact:

Oleksandr Talavera: oleksandr.talavera@gmail.com

RES media consultant Romesh Vaitilingam:
+44 (0) 7768 661095
romesh@vaitilingam.com
@econromesh

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