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DERI – DIGITAL ENTERPRISE RESEARCH INSTITUTE

COMPARATIVE STUDY OF

ELECTRONIC MARKET EFFICIENCY:BRICKS AND MORTAR VS. BRICKS

AND CLICKS

Stephen Kinsella

DERI LION DELIVERABLE 16.04

JUNE 30, 2005

DERI – DIGITAL ENTERPRISE RESEARCH INSTITUTE

DERI LION DELIVERABLE

DERI LION DELIVERABLE 16.04, JUNE 30, 2005

COMPARATIVE STUDY OF ELECTRONIC MARKET EFFICIENCY:BRICKS AND MORTAR VS. BRICKS AND CLICKS

Stephen Kinsella 1

Abstract. Beyond the rhetoric, how has widespread adoption of B2B and B2C ecommerce actu-ally impacted large bricks and mortar businesses? In this paper we review some of the economicapproaches to the analysis of efficiency as well as preliminary work establishing hypotheses to betested on a sample set, the answers we expect to see, and the implications for the Semantic Web,should all the rhetoric turn out to be just that.

Keywords: Ecommerce, characteristics of goods traded online, relative measures of efficiency on-line, Semantic Web.

1Digital Enterprise Research Institute Galway, National University of Ireland GalwayUniversity Road, Galway, Ireland E-mail: stephen.kinsella@deri.org

Acknowledgements: This material is based upon works supported by the Science Foundation Ireland underGrant No. 02/CE1/I131. The opinions, findings and conclusions or recommendations expressed in thismaterial are those of the author and do not necessarily reflect the views of the Science Foundation Ireland, orNUI.Copyright c© 2005 by the authors

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Contents1 Introduction 1

2 Characteristics of Internet Products 22.1 E-Commerce Changes the Way Prices are set in Bricks and Mortar Firms . . . . . . . . . . . . . . . 22.2 Pricing Digital Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.3 Adoption and Network Externalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

3 Price Levels and Price Dispersion 6

4 Testing for Efficiency—Hypotheses 84.1 Data Collection and Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

5 Conclusion and Further Work 9

DERI LION D16.04 1

1 Introduction

For economists, the only thing the introduction of the World Wide Web did was lower search costs. It hasbeen known since the 1880’s that when search costs go to zero, competing firms offering undifferentiatedproducts have to charge the same competitive price [Bertrand, 1883]. The introduction of the Web certainlyreduced search and transactions costs on both the consumer- and producer- perspectives. According to theLaw of One Price, we should see near-identical prices for near-identical products. To paraphrase Shake-speare, ‘A hard-drive is a hard-drive is a hard-drive’. Initial evidence [Bailey et al. 1997, Bailey 1998,Smith and Brynjolfsson 2001] suggests that this does not hold for nearly identical commodity products likebooks, CDs, and software.

Lower price levels in the internet market are explained by the results derived in the literature on the“economics of imperfect information. This literature points to the importance of search costs on buyerbehavior. Following those results, it can be hypothesized that the online medium lowers search costs, makingprice information more available to buyers and electronic markets more competitive than traditional markets[Bakos, 1997]. As a result, prices on the Internet should be lower than in conventional markets.

Also, if consumers can be perfectly separated into two subgroups—experienced internet users and con-ventional buyers—the assumed lower search costs in the Internet market imply lower prices as compared tothe traditional market. This follows from the Salop and Stiglitz [1977] framework, where positive searchcosts leads to an equilibrium with two prices: one price equals marginal costs and applies for consumerswho are perfectly informed after investing in search costs; the other price equals the reservation price aslong as the proportion of uninformed consumers is large enough.

Price dispersion refers to the distribution of prices of a product or service with the same measuredcharacteristics across sellers. The explanation of price dispersion as a result of incomplete information datesback to Stigler [1961]. Following his framework, price dispersion is modeled as an equilibrium outcomewhen some consumers find it too costly to locate the lowest price offered in a market. Also, it is well knownthat if search costs are distributed among consumers and if sellers also have different costs, price dispersionwill be an equilibrium outcome. Thus, if electronic markets are highly competitive, one might expect thatprice dispersion is absent or vanishing from these markets as buyers with low search costs drive the higherpriced vendors out of business by not buying from them.

The Semantic Web is a jump forward in terms of integrating databases of consumers and producersthrough semantic web services and interoperable systems built on platforms like WSMX http://www.wsmx.org, WSML and WSMO http://www.wsmo.org/wsml/. Yet it too faces the problem ofeither capturing or negating the basic consumer-producer dichotomy: the consumer wants to buy moregoods for less, the producer wants to sell the least amount for the most. Nothing the Semantic Web does willchange that. In an earlier deliverable [D16.05] we point to the reasons why this is, but in one sentence: theSemantic Web does not reduce the fundamental uncertainty that surrounds the market on both sides, it onlyincreases the information space available to the consumer and producer and provides decision-making toolslike Web Services which allow them to navigate the information space more readily. The Semantic Webmay change what is consumed, how much, where and why, but not the consumer or producer themselves.But that is another day’s work. When writing about uncertainty, information [and its opposite, ignorance]and its effect on prices observed in trading, Nobel Laureate George Stigler [1961, pg. 224] observed that

[i]gnorance is like subzero weather: by a sufficient expenditure its effects upon people can bekept within tolerable bounds, but it would be wholly uneconomic entirely to eliminate all itseffects.

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This paper is concerned with highlighting the characteristics of goods sold online, defining what wemean by ‘efficiency’ and generating testable hypotheses for a study yet to be carried out. We concludewith what we expect questions based on the hypotheses to yield, and show how gaining a benchmark ofefficiency relative to bricks and mortar industries and by now traditional online ecommerce entities allows ametric with which we can gauge the success of the Semantic Web.

2 Characteristics of Internet Products

Nelson [1970] differentiated between search and experience goods. Search goods are defined as thosedominated by product attributes for which full information can be acquired prior to purchase. Experiencegoods are dominated by attributes that cannot be known until purchase and use of the product or for whichinformation search is more costly and/or difficult than direct product experience. Examples of search goodsinclude book, music CD, and branded products, etc. Clothes, musical instruments, fruits, and vegetables arekinds of experience goods.

If a good is a search good and its features can be objectively assessed using readily available information,the Internet could serve significant transaction and communication functions and hence affect transactionchannel and communication channel intermediaries involved with the good. If a good is an experience good,information about the goods features mat not be sufficient for a consumer to engage in an Internet-basedtransaction. Bailey et al, [1999] suggested that search goods were proper to buy on Internet for consumersbecause the incremental value of the Internet will be the provision of information in a more accessible,less costly, and more customizable format. Service fit for Internet selling because physical distribution isnot a problem to sell service on the net (e.g. stock exchange or banking). Connecting the Internet meansconnecting the channel of service. The Internet is a good and effective marketing channel of service itself. Incase of search goods, online buying intention might be higher than services or experience goods and onlinebuying intention of services might be higher than search goods.

2.1 E-Commerce Changes the Way Prices are set in Bricks and Mortar Firms

People do not trade haircuts online—yet. The array of products that are for sale is very large and growing,but most fall in to a few categories. Theses categories represent characteristices that change [sometimes]the way that firms can set prices and receive cash for their services and goods. All products are sold on theweb as representations of what is actually being bought—even experience goods like videos are bought astokens, using tokens. This is a fundamental aspect in assessing firm efficiency online versus efficiency inthe real world. If the product does not have to be somewhere for the consumer to see it, or does not haveto exist before the buyer parts with their money, the firm’s cost advantage is growing. Most goods tradedonline fall into these rough categories [Choi, Stahl & Whinston, 2003, pg. 10]. They are:

Information and entertainment products Examples include paper-based information products like news-papers, magazines, journals and books. Now one can access product information online like productspecs, user and sales training manuals. One can buy, use or download graphics like photographs,postcards, calendars, maps and posters, as well as audio and video files such as music recordings,speeches, movies, and even television programs.

Symbols, tokens and concepts Examples include tickets and reservations—airline, hotels, concerts, sportevents, and financial instruments—checks, electronic currencies, credit cards, and securities, all ofwhich have been traded online since the late 1980’s.

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Processes and Services Now all US Government services are accessible or aim to be accessible online, likeforms, claim procedures and welfare payments. Another obvious process is electronic messaging—letters, faxes, and telephone calls. The Web has also aided in the business value creation processesby partially automating and integration ordering, bookkeeping, inventorying and contracting services.Indeed it was this very hotchpotch of legacy software issues combined with the cost inefficienciesassociated with non-interoperable systems that created the need for the Semantic Web in the firstplace. Other Processes and services that are accessed online are auctions and electronic markets,remote education, and telemedicine.

2.2 Pricing Digital Products

One of the concerns of managers is how new technologies will change pricing of their products. The typeof product most suited to electronic distribution is the digital product or information good, which can beentirely digitized by the producer, downloaded from the Internet by consumers upon demand, and freelysent over telecommunication lines 1. We use the product in the strict economic sense to refer to either agood or a service. For example, both MP3 music, and a digital service like a search on Yahoo are digitalproducts. One of the main finding of the research literature is that the characteristic of digital products tohave a zero marginal cost of production, i.e. the cost of producing additional unit of a commodity 2.

Given this nature of the technological capability, the traditional economic result of pricing at marginalcost does not make any sense when analyzing the pricing issues in an e-commerce setting. Thus there is aneed to understand how firms price their product in this setting. There are plenty of studies in the literaturethat point to various factors involved in pricing digital products, including the willingness of the consumerto pay, search costs etc. Here we review some of the important contributions made to this literature.

A good starting point to understand the information goods pricing problem is the work by Shapiro andVarian 3. The authors give the example of the digital yellow pages, which were very costly to produce, butonce they had been encoded in digital form, they were essentially costless to reproduce. They show historicalevidence of how the first firm to produce the digital yellow pages product rapidly went out of business, asother firms were willing to undercut its price all the way down to zero. In this technological setting, the waysin which firms who produce digital products survive underlies the problem of information goods pricing.Cusumano and Yoffie offer an in-depth look at the way that pricing of free internet browsers has developed,and how pricing strategy and market adoption appear to relate. For instance, they show how firms exploitthe fact of connectedness of consumer to computer to implement complex, and even personalized pricingschemes, which would not be possible with the traditional posted price mechanism 4.

The other issue often cited in the literature is differential pricing (also referred to as price discrimination).Differential pricing occurs when a firm can effectively split or segment its overall market, such that it cancharge the different segments of its market different prices. Economic theory offers a great deal of insightabout the efficacy of differential pricing approaches, which are of considerable value to firms that sell in theInternet marketplace 5. Before understanding the research literature in the area, the following points need tobe taken into account: First, it is worthwhile to emphasize how different digital products are from traditional

1Online magazine content, digital music, software objects and packages, digitized maps and information archives all qualify asdigital products.

2For instance, Netscapes Navigator software cost millions of dollars to create the first copy, but it is nearly free to makesubsequent copies.

3See Shapiro and Varian [1999] for a comprehensive overview of the subject.4See Cusumano and Yoffie [1998]5See Varian [1995]

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products. Often, there is no physical production involved, at least in terms of resources other than humanlabor and intellectual capital. Second, digital products frame the issue of intellectual property rights, becausedigital products can be reproduced for free and then distributed by anyone who has acquired an initial copy.Third, digital products typically are interdependent with standards and technological compatibilities thatpave the way for product success implying the fact that the effect of network externalities on adoption ofdigital products in the marketplace.

Shapiro and Varian look at product versioning in the case of information goods and digital products 6.According to the authors, versioning is a necessity in these situations, because of the logic of marginal cost-based pricing. Versioning enables higher willingness-to-pay consumers to pay positive prices for the item,which generates revenues for the firm and a large margin. But, it is also the case that in a competitive market,there will be some consumers whose value for given information good is only marginally greater than zero.Yet, with a near zero marginal cost of production for that information good, some firms will still have anincentive to serve such consumers and this, then, sets the stage for major players in the market to provideinformation products to these consumers at a price that is near zero. However, they cannot do this withoutmaking the features of the near-zero price products somewhat less attractive than the original product andthus effectively differentiating the market into two groups: one with lower willingness-to pay and those withhigher willingness-to-pay. Thus market arrives at versioning as a solution, with lower willingness-to-payconsumers are served with less capable version of the product, while higher willingness-to-pay consumerschoose the full-featured version of the product.

In contrast to the earlier to study, Bhargava and Choudharys study indicates that versioning may not begood solution to the pricing of information goods, where the marginal cost of quality does not increase atan increasing rate. The authors are able to show that in such circumstances selling multiple versions of aproduct at multiple quality levels decreases profits relative to selling only the highest quality of the product.The reason for this counter-intuitive finding is that the introduction of a second, lower quality product causesan increase in the number of low value consumers, but it cannibalizes part of the market, willing to pay thehigher price. In the presence of diminishing cost of quality, the loss of high willingness-to-pay consumersoutweighs the any gain from an increase in the number of lower willingness-to-pay consumers.

Yet another offshoot of the pricing discussion for information goods involves variations on the theme ofproduct differentiation. There are many studies show how producers are able to collect additional surplusthrough product differentiation. For example, Clemons et.al, investigate price dispersion in the online marketfor travel agency services. They find that product differentiation explains some, but not all of the variationin prices that travel agents charge for airline tickets 7. Bakos et al, compare prices for traditional and onlinebrokers, and for full service online brokers and discount online brokers. Their main finding is that evenafter controlling for execution quality, they see significant total price differences across the three types ofbrokerage 8. Brynjolfsson and Smith, find that both brand name and prior interaction are important toconsumers, allowing better known firms to charge higher prices than less well known firms for books 9.

2.3 Adoption and Network Externalities

Another important topic that occurs in e-commerce at the product level is network externalities and adoption.The basic issue is the extent of compatibility that exists among products and tools associated with the Web,

6See Shapiro and Varian [1998]7See Clemons, Hann and Hitt [1997].8See Bakos et al. [1999]9Brynjolfsson and Smith [1998].

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and what happens when incompatibilities reduce the value that technology solutions offer in the economyfor improving social welfare. There are many examples that illustrate these issues, from computer operatingsystems, to wireless communication protocols, to Web browsers etc. The classic illustration of this issueis the evolution of QWERTY typewriter keyboard. David in his study illustrates the value of networkexternalities, and what motivates their growth in the context of QWERTY keyboard. He shows how adoptionof the QWERTY standard by typists led to the adoption lock-in of the standard by firms, which, in turn,created a feedback loop leading to even greater adoption of the standard by typists 10. Network externalitiesarise because each additional user of a network increases the value of the network for all other users. Oneof the important issues involves the value of the network externality itself. Brynjolfsson and Kemerer andGandal are recognized for contributing the early empirical work on IT issues in this area 11. These authorsexamine the network externality arising from the Lotus spreadsheet standard. They find that Lotus wasable to charge significant rents due to its command of the market. Gallaugher and Wang examine networkexternalities in composite goods, such as client software and server software. They find that compositegood providers are able to command a higher premium than a single good provider, due to the networkexternalities inherent in the compatibility between each component 12.

Yet another question related to network externalities is how to price products that exhibit network exter-nalities. Because installed base is the foundation of value in a network externality product, it makes sensefor firms to lower the price of the product, effectively subsidizing adopters to build installed base. However,this strategy results in low or negative profits in the beginning. In a rapidly changing environment, wherethe life cycle of a product is measured in months rather than in years, it may not be profitable to sell at adiscount to build installed base. So from the perspective of firms overall profit maximization, the effectivestrategy for firms to adopt is to both short-term profit taking and longer-term installed base building 13.Similarly, Choudhary et al, show that software renting is an effective way of capturing consumer surplus inthe presence of network externalities 14. Parket and Van Alstyne, show that in a market with cross productexternalities it may be optimal to price one of the products at zero in perpetuity to generate demand for theother product. They cite the example of Netscape, where the company gave its browser for free to createdemand for its server products 15.

In addition to the externality arising from the use of a product, it is also important to consider the effect ofnetwork externality on systems competition. How does the externality associated with one product influencethe development of other products? For example, how has the externality of Microsoft Windows influencedthe development of the PC market, or the browser market? Katz and Shapiro, discuss a number of relatedissues and suggest that in the presence of network externalities, firms may make sub-optimal investmentdecisions. Because the network has little value when there are few members, there is little incentive for newmembers to join, thus to attract members to a network requires that there already be members on the network.This leads to at least two equilibrium outcomes, one of which is no network usage. In addition, whenexternalities are present, the result is often a more concentrated or even a monopolistic market, resulting ineven more deadweight loss 16.

We can thus say that goods traded online are characterised by:10Brynjolfsson and Smith [1998], See David [1985]. Also see Arthur [1989] for a model of lock-in of technical standards due to

historical events.11See Brynjolfsson and Kemerer [1996], Gandal [1994].12See Gallaugher and Wang [1999].13See Mantena and Sundararajan [1999]14See Choudhary [1997].15See Parker Van Alstyne [2000]16See Katz and Shapiro [1994]

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• Greater heterogeneity of demand

• Often time-dependent [forecasts, news]

• Network externalities – the value of the product increases as more people use it [e.g., software]

• Higher value of exclusive information in some cases [e.g. market information for speculation]

But how do these characteristics affect price dispersion online?

3 Price Levels and Price Dispersion

Significant price dispersion exists on the internet for a range of goods and services and across time, regard-less of the claims for frictionless commerce by some 17. There are significant differences in how the priceswere measured, at what level, and what measure of price dispersion was used.

Most studies began by simply collecting data on [relatively] homogenous goods in liquid markets at onepoint in time, stripping the prices of exchanges rate differences, shipping and handling costs, and the like.The main price data was then subjected to the standard battery of descriptive statistical tests, and arithmeticmeans and medians were calculated from them. From these means the standard deviation was calculated,and it is this [or a variant of it] that stands as the measure of price dispersion of the product from the mean.Then simple statistical tests were performed on the means and standard deviations to see if the differenceswere statistically significant, and once this appeared to be true for many commodities [books, CDs, flights,DVDs, magazines, hard-drives, etc] the researcher concluded that price dispersion did exist.

However, many factors affect the level of a price, that is, the number that a consumer sees when theyclick on a product’s characteristics. Standard textbooks tell us that the price of a product, when set by theseller, depends on the costs of factors of production [raw materials, labour, etc], weakening or strengtheningdemand for the good or service, changing inventories, changes in supplier productivity, location, informationavailable to the consumer, how the good is bundled, transaction costs associated with a potential purchaseand the effects of advertising. Only a few relevant attributes are really different when commerce moves intoan internet context:

Geography Location and environment play a fundamental role in the sale and supply of goods and servicesin the ‘real’ world. The internet has few such barriers. While an address like ‘.com’ rather than‘.org’ might have some pull to it, ‘location’ online is a number assigned to a set of pages resting on aserver called through a standard protocol, and the consumer can search through these numbers usingan indexer like google or yahoo very quickly. The consumer might be tempted away from mainstreamecommerce sites like amazon.com to less well known sites by a price differential, but it remains to beseen just how much a difference will make consumers switch.

Information Levels of information are much greater on the internet in one aspect, and much less in others.One cannot touch or use the good, normally, when it is being sold on the internet. One cannot hagglefor a price as in a bazaar, normally. The main aspect of electronic commerce is that it reduces one’ssearch times enormously and increases the set of potential purchases the consumer might make. Theconsumer is still bound by their preferences; their wants and needs have not changed. Only the typesof products invented to address those wants and needs through commerce and the mode of delivery

17See Bakos et al, [1999].

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have changed. The consumer is awash with information about specifications and product informationas well as shipping and handling charges, but the consumer also has to deal with the problem ofinterpreting these and other elements of the final price of the product before making the decision tobuy or not.

Timeliness Time dependent products lose value rapidly, which may be a deterrent to offering them for resaleor distributing without authorization. Timeliness is critical to the daily news, stock quotes, and otherinformation needed for quick decision-making. The timely value of these products can be maintainedby periodic updates and sold as subscription goods whereby sellers retain some control. Examplesare stock quotes, government-issued economic data, and journal abstracts. Time-dependent productsbecome obsolete and worthless when they are out-of-date. Artificially created time-dependence, how-ever, can be useful. For example, it can convert time-independent, durable goods into non-durablegoods. Considering the indestructibility of digital products, this is the most important aspect whichfirms can exploit in marketing. For example, a Web page providing information about a resort townmay be visited once. To entice re-visits, the content of the Web page should be updated periodically.Updating in this regard is an arbitrary means to make old products obsolete and open new marketingopportunities. When a digital product is time-independent, sellers tend to use such strategies to trans-form it into a time-dependent product. Time-dependence may be specific to the individual or maybe applied to all consumers. The timeliness of news and stock quotes, for example, is general to allconsumers. The freshnessand the valueof the information diminishes at the same rate for everybody.When such products are offered the next day, their prices would reflect their reduced valuation acrossthe market. However, the result of searches and queries made by a consumer for a specific decision-making is time-dependent to that consumer only. Suppose Alice wants to buy information on thesales figures of a firm in which she is considering investing. This information is time-dependentfor Alice since it is useful for her decision. But after the decision is made, the information is nolonger needed. However, it may still be of considerable value to Bob who compiles a table of salesrevenues. In such case, Alice will be able to use the information and still sell it to Bob at the fullprice. In keeping with this, time-dependent products can be further divided into two subgroups. Mostdatabases, including indexes and directories, are time-dependent specific to individuals, while newsand stock quotes are time-dependent general to all buyers. This difference is apparent if we considera similar distinction in TV programs. Producers of many programs, in particular of sitcoms and TVmovies, depend on revenues from reruns and syndication. These programs find audience who missedthe first time. In contrast, news and sports programs in general are not rebroadcast because of theirtimedependence across all consumers. Magazine-format news programs have been popular despitethis disadvantage because of low production costs. More to the point, these programs often deal withtime insensitive topics, and they themselves recycle old programsfor example, features about ’ThisDay in History’ and update segments. Similar adaptive strategies may be applicable to digital productmarketing. To sum up, time-dependence may or may not be advantageous to marketers. Since timede-pendent products lose their value rapidly, there is a limited window for marketing. But on the otherhand, time-dependence discourages reproduction and reselling, and avoids the problem of a durablegoodcompeting with its own past sales. When consumer reselling is not a concern, products may bemore valuable if they are made timeindependent. Bundling information into large databases, archives,and references helps to reduce time-dependence. When the durable goods problem is present, sellersincrease time-dependence. Software, including computer programs and games, is generally timeinde-pendent. Here, software vendors use updates quite often, as discussed earlier, to force people to buy

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new products.

So what do we know about efficiency online from this? We know search costs matter, that differentialproduct characteristics matter, and that intensity of search should increase with the expected gain frombuying a more valuable object at a cheaper price. We we are now ready to formulate our hypotheses.

4 Testing for Efficiency—Hypotheses

So far we have identified three main areas of study with regard to bricks and mortar and bricks and clicksfirms that we think are worthy of study. We summarise our research questions and our expected findingsbelow.

Hypothesis One In highly competitive market environments, where offline vendors have significant marketshare and consumers are price-conscious, the online market should exhibit intense price competition.As a result, we expect less variability in prices across vendors.

The level of product demand for time-sensitive products such as computer commodities should decreaseover time as new models become available in the market. the price dispersion of highly demanded [orfrequently purchased] products is smaller than that of low demand [less frequently purchased] productsdue to a large number of requests for price-quotes and more frequent advertisements18. As a product ages,the popularity of the product decreases, as does the level of demand. Consequently, price dispersion fora particular product across vendors is expected to increase over time. We expect to see this as a directconsequence of what Stigler [1961, pg. 219 ] describes as one of the fundamental sources of price dispersion”The larger the fraction of the buyer’s expenditures on the commodity, the greater the amount of search.”

Hypothesis Two As the demand for time-sensitive products drops over time, price dispersion across ven-dors increases.

We identified time sensitivity as a key factor in determining the price of a good in deliverable D17.01,and that finding continues in this work. The nominal variability in prices is naturally larger in marketsfor expensive homogeneous goods than in those for inexpensive goods. As a result, the mean price of theproduct is positively related to the degree of price dispersion. The positive relationship between these twovariables suggests that the amount of search performed by consumers depends on the price of the product.

Hypothesis Three Due to the potentially larger savings, consumers engage in more intense search whenpurchasing expensive products than inexpensive ones. Therefore, the amount of price dispersion islower for expensive products than for inexpensive products.

This follows directly from Stigler’s [1961, pg 212] observation that “The larger the fraction of repet-itive [experienced] buyers in the market, the greater the effective amount of search.” The timing of priceadjustments among different vendors reflects the degree of competition in the market. There has been anongoing debate over the timing of price adjustment by different sellers [Brynjolfsson & Kahin, 2000]. Si-multaneous or synchronized adjustment is considered optimum in the Walrasian market. However, modelsgrounded in Keynesian microeconomics postulate that ”staggered” price setting, under which sellers change

18According to Stigler [1961].

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prices at different times, is the equilibrium outcome due to exogenous market frictions such as substantialmenu costs and sellers price search costs. While the presence of price dispersion in electronic markets iswell documented, little is known about whether or not sellers in the electronic market make price changessimultaneously. We expect that price adjustments in the electronic fixed-price market are synchronized dueto the ease with which sellers can observe competitors prices. Electronic markets also reduce menu costs toa minimum. By utilizing either proprietary pricebots or publicly available price comparison sites, sellers inthe electronic fixed-price market can easily ascertain competitors prices, which should increase the velocityof information in the market and drive prices, if not to the minimum, then certainly towards one another.

Hypothesis Four Due to increased price competition in the electronic market, there is significant differenceamong sellers with respect to the magnitude of price changes; the degree of price reduction by high-priced vendors is expected to be larger than that of low-priced vendors.

High-priced vendors can deliberately change prices in a random fashion so that consumers cannot learnprices [Varian, 1980]. The “intentional fluctuation in price is aimed at extracting more revenue from un-informed consumers. Consequently, some vendors with higher prices are expected to exhibit bigger fluc-tuations in price ranks across different time periods to avoid price competition.Thus we expect high pricedvendors to resist price competition by deliberately changing their price strategies in order to prevent con-sumers from learning their “true prices.

4.1 Data Collection and Methodology

An online survey will be carried out of decision makers at small and medium ebusinesses with no bricks andmortar connection, and another with consumers at a shopbot to test hypothesis one. This will be done usingout of the box survey technology like SPSS and http://www.surveymonkey.com/.

Next a price/quantity data set will be gathered using price data from shopbots or spidered data fromseveral of them. Both of these require resources to achieve fully and test all of the hypotheses.

5 Conclusion and Further Work

This small paper has tried to throw light on the differences between the concepts of efficiency used inthe theoretical economics literature, used in the empirical studies, and those used in other disciplines. Wehave formulated our hypotheses based on an in depth review of previous approaches, and made fast ourhypotheses and our methodology in carrying out a study of this type soon, given adequate resources. Thestudy will give a benchmark for the progress of the Semantic Web and its applications in terms of the typesof efficiencies it creates, and can be used as a metric of success or failure on its own terms.

Further work is obviously to carry out the study and report the results in a forthcoming deliverable, andto disseminate this work amongst our colleagues at DERI.

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