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By Fang-fang Tang, Ding Lu and Hoong Pok Ho


Empirical analysis from several recent studies has shown mixed results on the “frictionless market ” hypothesis, claimed by many, about Internet retailing compared to conventional channels. This study takes a different approach to deal with this paradox of online retailing. Focusing on a homogenous product (books), we use two data sets collected in 1999 and 2000 with a total of 6650 price observations to compare the pricing behavior of major online branches of traditional bookshops (3 in 1999 and 5 in 2000) with the top specialized Internet retailers (2 in 1999 and 5 in 2000). We find that prices by the specialized Internet retailers are generally lower than prices by the hybrids online, on average 6.7 % in 1999 and 11.3 % in 2000. Further, price changes by both types are few but price adjustments are large (greater than $1 for over two third cases), indicating that menu cost is not as negligible as many claim for the online markets. Statistic evidence shows that price dispersion is lower among the specialized Internet retailers than that among the online branches of conventional bookshops, presumably reflecting the different levels of competition pressure and constraints in the sense that the hybrids ’ pricing behavior has to be part of their integrated strategies for both online and offline markets while the former relies solely on online sales for survival. We conclude that the online book market is far from perfectly competitive or frictionless. Market power and offline pricing behavior continues to influence the online competition. (Online market; Internet retailer; online branch; pricing; menu cost; homogeneous goods

Topics: Ho is affiliated with Ernst & Young and Lu is affiliated with the National University of Singapore.
Year: 2011
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