conomics - Deutsche Bank Research

Economics
Digital Economy
July 2, 2003
No. 38
conomics
Digital economy and structural change
B2C e-commerce: internet is no “great
equaliser”
• The growing use of B2C e-commerce has gone hand in hand with the expectation
that very low search costs for consumers and increased competition for
suppliers would cause a rapid decline in prices for online products. This has
not been borne out, so although the next supplier is theoretically only a mouseclick away, the internet will not lead to highly price-competitive markets.
• Studies document that lower online prices have only materialised in the case of
certain product groups. Moreover, considerable price differences are still to
be found among suppliers of comparable goods. As users become more familiar
with the internet as shopping medium these gaps are likely to narrow, but not
disappear altogether.
• Many consumers still have relatively little experience with the possibilities
offered by the internet and e-commerce. This is reflected in their shopping patterns:
online buyers seldom use search engines. Moreover, most consumers frequently
call up their favourite shopping site directly, so there is no systematic search for
a desired product. The result is price dispersion among comparable goods.
• The loyalty of consumers to a particular online provider is greater than was
thought at the beginning of the internet hype. The mistaken assumption that
online consumers were “disloyal bargain hunters“ was due to the fact that
the behavioural component was neglected. But internet shopping is also about
consumer trust in the seller.
Editors
Antje Stobbe
+49 69 910-31847
[email protected]
Stefan Heng
+49 69 910-31774
[email protected]
Technical Assistant
Sabine Kaiser
+49 69 910-31831
[email protected]
Deutsche Bank Research
Frankfurt am Main
Germany
Internet: www.dbresearch.com
E-mail: [email protected]
Fax: +49 69 910-31877
Managing Director
Norbert Walter
• Trust in the source plays a very special role in the internet world, particularly
because of the distance separating buyer, seller and product. Online
customers regard brands as a seal of quality for the reliability of the seller, and
also for impeccable service. This means that brand dealers can charge higher
prices than less-known competitors.
• New competitive strategies will emerge for online traders. The objective is to
secure the loyalty of customers to a particular website on a long-term basis.
Detailed information about customer behaviour and preferences helps the
suppliers, via effective personalisation systems, to optimise the presentation
of their products to individual customers and to anticipate their needs. From the
standpoint of the suppliers, this will weaken competition on price.
Antje Stobbe, +49 69 910-31847 ([email protected]),
with contributions from Mareen Linnert and Oliver Röhn
conomics
2
Economics
conomics
B2C e-commerce: internet is no
“great equaliser”
During the heady days of internet hype, not only were the business
models and earnings prospects of countless firms judged much too
positively. Many observers also overestimated the effects of the internet
on consumer behaviour and the retail trade. At the end of the 1990s
analysts were predicting a sharp decline in customer loyalty, a massive
increase in supply-side competition and hence an enormous degree of
price pressure. It seemed as though the textbook description of the
“efficient market“ and perfect competition was about to become reality.
The explanation was obvious: increasing product and price transparency
would raise the market clout of consumers; low market entry costs
would sharpen competition among suppliers. The internet was seen as
a “great equaliser“1 which would enable even the smallest of firms to
enter existing markets and compete with big, established companies
without any problem. This study examines whether online markets really
are more efficient than conventional ones, looking at what reasons there
are for any inefficiencies and what implications they have for the
suppliers’ web presence.
Are online markets really more
efficient?
How does the internet influence prices?
There are various ways in which the internet can lead to lower prices,
higher price sensitivity on the part of consumers and smaller price
differences between largely identical goods:
Search costs: For the internet as electronic “market“ it may be assumed
that there is nearly unlimited availability of information on products,
their quality and their price. The use of shopbots or special websites
with price comparisons (“pricebots“) makes it easier for a customer to
find the cheapest price and also any additionally required product
information with a single click. If search costs are very low, buyers and
sellers in an electronic market – ideally – have identical information on
products and conditions. This symmetric distribution of information
should, in the ideal case, result in customers invariably choosing the
supplier with the lowest price, given identical product characteristics,
and thus generally cause the online price level to fall – and ultimately
also the offline level. At the same time, price differences between goods
of an identical nature (price dispersion) ought to disappear.
Market entry costs: In an ideal internet model the entry costs for online
traders are low: instead of a complete network of stores they merely
require a website and perhaps a delivery warehouse in order to conduct
their business. Market entry of additional sellers, or simply the possibility
that competitors would have little difficulty in penetrating the market,
tightens the competition and acts to reduce prices. Supply-side market
clout is humbled substantially in the internet. With fully digital goods
and services the operating costs of internet merchants will probably
also be lower than those of conventional retailers, which additionally
creates a competitive advantage and drives down prices.
1
Nearly unlimited availability of
information
Easy for competitors to penetrate the
market
Borland, J. (April 13, 1998): Move Over Megamalls, Cyberspace is the Great Retailing
Equalizer, Knight Ridder/Tribune Business News.
Economics
3
conomics
Menu costs (adjustment costs) arise when traders have to reprice
their wares. In conventional markets, retailers will only adjust their
prices if the resultant additional earnings outstrip the related costs. This
wait-and-see attitude in the face of changing market conditions causes
price adjustments to be postponed or never made at all (price rigidity).
In electronic markets, by contrast, the menu costs are low since the
price only has to be changed in a database. Price rigidity in the internet
is accordingly lower than in traditional markets. Studies have shown
that suppliers not only change their prices on the internet more frequently;
the changes are also much smaller. The smallest price change in online
trade in the USA is around 5 US cents for books (1 cent on CDs), in
contrast with 35 cents (USD 1) in conventional trade.2
Experience of internet users in
Western Europe
%
100
90
80
70
60
50
40
30
20
10
0
86
81
76
69
63
49
47
38
33
26
17
14
22
11
18
9
14
6
5
11
3
2001 2002 2003 2004 2005 2006 2007
The mechanisms described suggest that:
1 year or less
a. prices quoted on the internet are lower than conventional retail prices,
1-2 years
More than 2 years
b. the gap between the highest and the lowest price for a product
available online, compared with offline, is much smaller or, ideally,
non-existent,
Source: Jupiter Research, 2002
c. consumers respond very sensitively to minor price changes on the
internet (high price elasticity).
Are online markets more efficient than conventional
ones?
Empirical research gives only partial backing to these three presumed
mechanisms.
• In a few online segments prices really are lower than in conventional
retail business. For example, US prices for books and CDs are 9
and 16% lower on average, respectively, than those in conventional
trade.3 However, even informed consumers do not always buy these
items from the dealers with the lowest prices. In fact the most
price-sensitive, the users of shopbots, do not choose the cheapest
offer in 51% of the cases observed.4
• Besides, even goods with identical characteristics (homogeneous
goods), such as books, CDs and airline tickets, continue to show
substantial price differences among the offers of various online
dealers. Smith and Brynjolfsson5 analysed the search result of an
American shopbot for books and came to the conclusion that the
lowest price was 28% below the average price of the offers shown.
• Various surveys show that the price of a product generally plays a
decisive role for an online shopper. Experiments underpin the findings
of how consumers assess their own habits: they react very
sensitively to price changes when shopping for homogeneous
goods online. However, if attributes such as product quality
(heterogeneous goods) are factored in, consumer behaviour proves
to be much more complex. If a search engine provides information
on product characteristics, consumers react less sensitively to price
Online buyers in Europe, 2001-2007
120
120
m
97
100
84
80
20
100
106
80
69
52
60
40
114
60
36
30
37
43
52
48
55
40
20
0
01
56
02
03
04
05
06
%
07
0
O nline buy ers (left)
O nline buy ers a s perc entage of online
popula tion (right)
Source: Jupiter R esearch, 2 00 2
Online buyers (% of internet users)
%
Occasionally
Frequently
2
See Brynjolfsson, E. and M.D. Smith (2000a): Frictionless Commerce? A Comparison
of Internet and Conventional Retailers, Management Science, Vol. 46, No. 4, p. 565.
3
See Brynjolfsson and M.D. Smith (2000a), p. 564.
GB DE SE IE FR FI ES IT GR EU
4
See Brynjolfsson, E. and M.D. Smith (2000b): The Great Equalizer? Consumer
Choice Behavior at Internet Shopbots, MIT Working Paper, July 2000, p. 15.
Excludes those who report buying "rarely".
5
4
See Smith, M.D. and E. Brynjolfsson (2001): Consumer Decision-making at an
Internet Shopbot: Brand Still Matters. Journal of Economic Literature, Vol. 49, No.
4, pp. 541-558.
Economics
Source: European Commission (Eurobarometer), June 2002
40
35
30
25
20
15
10
5
0
conomics
changes. Information on quality helps to differentiate products, so
the price is no longer the sole criterion for purchasing decisions.6 The
more information available on product characteristics, the less
significant the price component.
Average spending of an online
buyer, 2002
EUR
600
Summing up, there is some evidence that the online market has gained
in efficiency over the conventional market on account of lower search
and menu costs, even though considerable price gaps remain. This
process of change will presumably continue as consumers gather
experience with the internet as a shopping medium.
500
400
300
200
Limited experience hinders systematic research
According to recent surveys in several European countries, over 50% of
the population now use the internet. Despite this, people’s experience
with the options available on the web, especially with online shopping,
is still limited. It is estimated that in 2002 less than half of internet
users had more than 2 years’ online experience. By 2007, however, the
proportion should rise to 86% (see chart p. 4). It is still early days in B2C
e-commerce, too, even though the number of online shoppers in Europe
is growing continuously. In the EU ranking, Germany, with 24 frequent
or occasional buyers per 100 internet users, takes a leading position
behind the top country, the UK (37%) (see chart p. 4). But in 2002 a
typical German online shopper spent only about EUR 300, which was
below the EU average of EUR 380, according to estimates by Jupiter
Research.
The majority of internet users have little experience with shopbots.
In mid-2001, 61% of the internet users in Europe questioned by Jupiter
Research stated that they used the internet neither for research nor for
buying. Of the group that purchases on the internet, only 11% visit sites
that compare prices. 64% of those interviewed in Europe – and 79%(!)
in the UK – go straight to sites that sell one or more familiar brand
products (see chart p. 6). Even in one of the most mature internet markets,
the USA, the majority of consumers use an online shop that they already
know: most type the address in a browser (41%) or bookmark the site
(20%) (see chart p. 7). Consumers who shop online at all thus limit their
selection to just a few familiar websites. This is backed by a study
which shows that – depending on the product (books, CDs, travel) –
consumers visit only 1.2 to 1.8 product-specific sites per month. Evidently,
online buyers who have been satisfied with a purchase transaction do
not switch on the spur of the moment to another online shop.
But habits change with growing online experience: veteran internet
customers are much more likely to change to a cheaper supplier than
inexperienced users. This means that as the online market matures and
consumers gain more experience, the price sensitivity of users will
probably tend to rise and price differences tend to narrow.
Consumers who currently make little use of shopbots are forced, however,
to evaluate the huge range of information in the internet and select a
suitable supplier themselves, at least in their first search (costs of
information selection). Even if they use a search engine they will often
obtain a confusing mass of information, with the result that most
6
700
100
0
GB FI SE EU FR ES DE IT IE GR
Source: Jupiter Research, 2002
Consumers: online research
and purchase
Neither research nor
purchase online
61
Research online,
purchase online
15
Research online,
purchase in store
11
9
Don’t know
Research online,
purchase by phone
2
Research in printed
catalogue, purchase
online
2
Research in store,
purchase online
1
%
0 10 20 30 40 50 60 70
Quelle: Jupiter MMXI, 2001
See Diehl, K.; L.J. Kornish and J.G. Lynch, Jr. (2002): Smart Agents: When Lower
Search Costs for Quality Information Increase Price Sensitivity, Journal of
Consumer Research, June 2003; Lynch, J.G. und D. Ariely (2000): Wine Online:
Search Cost and Competition on Price, Quality, and Distribution, Marketing Science,
Vol. 19, No. 1, pp. 83-103.
Economics
5
conomics
consumers opt only for sites that they already know or have been
recommended (awareness). In many cases these are sites of wellknown (online) suppliers of brand products. Consumers are therefore
likely to be asymmetrically informed: customers with more experience
use shopbots, for example, and will tend to buy products more cheaply,
while less well-informed customers do not assess the great variety of
online offers systematically and may buy more expensive products.
Empirical surveys have indeed shown that online merchants with high
awareness ratings set prices 7-12% higher than less well-known traders.
Prices for comparable goods will therefore continue to differ over the
medium term. The quite considerable costs of information selection
and the resultant information asymmetries between buyer and seller
play a role here. But structural aspects of online shopping and the
strategies adopted by internet sellers to distinguish themselves from
the competition also play a part – as explained in the following.
Trust as key to B2C e-commerce
Trust plays a very special role in the internet world, particularly because
of the distance separating buyer, seller and product. In conventional
retailing the customer can examine the quality of many products in the
shop before buying (“search goods“), but this is not possible on the
internet. As a rule, shoppers have limited knowledge about products
offered online. They therefore run certain risks if they decide to buy;
there is, for instance, a danger that the product may not be in line with
the product description (representation risks). Owing to the separation
of payment and delivery, in the case of physical goods the customer is
often uncertain whether the product will be delivered at all (performance
risks). Finally, the quality of service, e.g. correct and prompt delivery
and confidential treatment of the personal data provided, becomes
more important for the customer as he cannot readily judge the
trustworthiness of all those involved in the transaction (network risks).7
Concern about security quite generally is still the main reason worldwide for not buying products online. For instance, 30% of non-buyers
say they do not want to disclose their credit card details, and 28% cite
concern about a lower level of security than with conventional shopping
as the reason for their decision (see chart p. 7). In Germany this view is
even more widespread: 75% of those interviewed considered it safer
to buy in conventional stores than online (see chart p. 8).
Since the customer does not initially know whether a particular supplier
is reliable, he has to go by experience. The services that have to be
“consumed“ when buying a product can be characterised as an
experience good. Consumers therefore tend to select a provider whom
they already trust.
Suppliers want to generate trust
Suppliers therefore want to signal to consumers that they are a
trustworthy business partner. Brands and advertising already have a
major influence on buying behaviour in conventional markets. On the
internet their importance as a signal of trustworthiness is considerable
greater. The chart on this page showing how online buyers use the web
underscores the importance of branding: websites offering one or more
brands attracted the most customers.
7
6
See Riemer, K. and C. Totz (2001): Nachhaltige Kundenbindung durch
Vertrauensmanagement, in: Klietmann, M., Kunden im E-Commerce, Düsseldorf.
Economics
What sites do online consumers
use?
Sites that sell
many brands
35
Sites that sell
one brand
29
Portal
shopping
channels
19
Sites that
provide store
ratings
12
Sites that
compare
prices
11
Sites that
give product
advice
9
Sites that
review
products
9
Product user
communities
4
29
Other sites
0
10
Source: Jupiter MMXI, 2001
20
%
30
40
conomics
Reasons for not shopping online (world-wide)*)
Didn’t want to give credit card
details/security
25
30
18
It’s more secure buying in a store
28
17
Easier/more fun to buy in a store
25
16
You don’t know what you get
21
20
Other reasons
19
Don’t trust online brands/lack of
trustworthiness
11
15
7
It’s too difficult/lack of knowledge
10
Prices too high/expect lower prices on
the internet
6
9
5
Products not very interesting
8
Delivery times too long/other delivery
problems
6
8
2002
2
3
Didn’t pass credit check
0
5
"How did you find the website
where you made your most
recent online purchase?"
2001
%
10
15
20
25
30
35
*) Percentage of those who have not
shopped online and do not plan to.
Source: Global eCommerce Report 2002 (Taylor Nelson Sofres Interactive)
Surveys indicate that online customers regard brands also as a seal
of quality for good service, especially for smooth delivery. Customers
are prepared to pay a higher price for this quality seal. Since consumers
differ in the value they attach to impeccable service, their willingness to
pay will vary, even for identical products, depending on the online dealer
and how much the individual trusts him. This may lead to different prices
for identical products in the online market.
Empirical studies show this to be the case even among shopbot
buyers, who are very well informed and can be considered extremely
price sensitive. Even from this group of customers, brand dealers in
the book market can demand a 3-5% higher price. And suppliers who
have already enjoyed a customer’s patronage obtain a premium of as
much as 6.8%. Customers whose main criterion is not the price but
features that cannot be specified in the contract, such as mailing time,
respond even more strongly to brand presence.8
Internet suppliers who have built up a brand in conventional trading
before going online are therefore usually at an advantage compared
with pure-play online traders as regards brand awareness and reputation.
Only few of these pure plays have succeeded in capturing a dominant
market position – and most of them had to spend heavily on advertising.
8
Typed
address
in browser
%
Used
bookmarked
site
Search
engine
None of
these
Clicked on
email ad
Clicked on
link
Visited online
mall/portal
Clicked on ad
at another
website
0
20
40
Base: US web buyers
60
Source: Forrester Research, 2002
See Smith, M.D. and E. Brynjolfsson (2001).
Economics
7
conomics
Reasons for not shopping online (Germany)
It’s more secure buying in a store
75
Easier/more fun to buy in a store
74
Didn’t want to give credit card
details/security
73
41
You don’t know what you get
Don’t trust online brands/lack of
trustworthiness
30
Prices too high/expect lower prices on
the internet
21
Other reasons
17
Products not very interesting
17
Delivery times too long/other delivery
problems
15
It’s too difficult/lack of knowledge
11
1
Didn’t pass credit check
%
0
10
20
30
40
50
60
70
80
Source: Global eCommerce Report 2002 (Taylor Nelson Sofres Interactive)
Partner programmes as alternative
Pure-play internet providers can seek to compensate the lack of customer
trust in various ways, for example by setting up partner programmes.
Such programmes enable small firms to place their products and
services on the websites of better-known partners. Links and advertising
banners are the means most frequently used. These “virtual
communities“ can extend the reach of new providers and attract rising
numbers of visitors to their little-known websites. Many smaller, lessknown online merchants make use of the positive image transfer effects
of real-world or virtual brands via partner programmes. But companies
that are large household names also engage in partner programmes,
offering cooperating sites, for example, a refund of 5-15% of the
advertising costs for a “linked“ purchase. Sites that offer complementary
products, services or information are particularly suitable for such a
network. Suppliers also seek to put across the message that they are
reliable and offer good service by providing “neutral“ information on
their products or services on the site. This may take the form of
recommendations from other customers.
Small suppliers benefit from big
names
In brief, the loyalty of consumers to a particular online provider is greater
than was thought at the beginning of the internet hype. The mistaken
assumption that online consumers were disloyal bargain hunters was
due to the fact that the behavioural component was neglected. But
internet shopping is not just about low search costs: consumer trust in
the seller is a particularly important factor.
Loyalty greater than assumed at the
start of the hype
8
Economics
conomics
Customer lock-in through personalisation
Even though the online customer is not as fickle as predicted at the
height of the internet hype, the battle for his custom is still fierce.
Providers look for ways to hold onto customers over the medium term
and to exploit the limited pricing scope. Personalisation strategies
and improved user guidance are two such instruments. If a merchant
succeeds in standing out from the competition, he can charge higher
prices.
In the web world it is vital for a supplier to become the customer’s site
of choice and achieve customer lock-in. He will therefore try to increase
his customers’ switching costs. Such costs arise, for example, if the
customer has to identify himself again in order to participate in auctions,
if he has to familiarise himself with a new interface, or if he first has to
create a customised range of goods.
Suppliers want to achieve long-term
customer lock-in
Personalisation can be a particularly effective means of lock-in.
Information and goods are offered selectively according to the customer’s
needs and interests. The relatively high market transparency on the
internet not only allows buyers to collect information on prices and
suppliers, it also enables sellers to glean more information about their
customers, and more easily. Repeated visits to a website enable the
online merchant to determine the customer’s tastes and compare them
with the purchase patterns of like-minded buyers in order to make
personalised recommendations. When the customer revisits the site
he is addressed by name and is immediately offered products or services
in line with his interests, or even customised product versions. If he
orders goods several times certain data are stored so it takes just one
click to place the next order. In this way the merchant creates an additional
benefit for the customer, which bolsters his loyalty to the site. Repeated
visits familiarise both customer and provider increasingly with each
other, with the result that the additional benefit to the customer (and
therefore also the cost of switching) rises strongly. The system gets to
“know“ the customer’s wishes more and more precisely – and it is
practically impossible for a rival provider to match this advantage quickly.
Kevin Kelly summarised, back in 1998, what online providers should be
aiming for: not only to create what the customer wants, but also to
remember and anticipate what he wants.9
Personalisation attractive for the
user
Simple user guidance as customer lock-in
Familiarity with the website and simple, attractive user guidance can
be enough to achieve customer lock-in. If a customer has successfully
bought a CD, for example, then he is already acquainted with the user
guidance of that site. This makes the site relatively more attractive than
unfamiliar sites when he makes his next purchase. Growing experience
with a particular site increases the user’s switching costs. User
guidance that is easy to grasp intuitively, coupled with high-quality
personalisation, can create a “cognitive loyalty programme“. 10 The
probability of a repeat purchase correlates positively with the user
friendliness of a site. And subsequent purchases are faster for the
customer: Amazon customers, for example, require only about half as
long when they visit the page for the fifth time as they did for their first
purchase. If a customer first has to get to know another site he needs
more time, and this discourages him from switching to the competition.
This time advantage allows the provider of the more customer-friendly
site to charge a higher price.
9
See Kelly, K (1998): New Rules for the New Economy, p. 124ff.
10
See Johnson, E.J., St. Bellman, and G.L. Lohse (2002): Cognitive Lock-In and the
Power Law of Practice, Working Paper, Columbia School of Business, p. 2.
Economics
Price discrimination as option for
providers
Our analysis has focused so far on differences
in prices asked by different suppliers. In the
case of price discrimination the essential
aspect is that one supplier asks different
prices for similar or identical products,
depending on the individual customer’s
willingness to pay for the product in question.
For many online publishers, the poor business
situation is a major reason why they no longer
provide free information, for example, and
instead charge for each article or batch of
articles. To prevent customers turning
elsewhere, the providers often adopt a mixed
strategy: much of the information is offered
free and the remainder is sold in different
packages at different prices.
It is particularly easy to set differing prices for
digital goods by offering various versions, e.g.
of software, or bundling certain products. Digital
goods typically have high first copy costs and
– with automated copy processes – variable
costs that tend towards zero. Price
discrimination can enable providers to earn a
positive margin even when customers’
willingness to pay is low. The fact that menu
costs on the internet are negligible makes it
easy for sellers to adjust their prices to specific
customer groups or even to the individual
customer. For a balanced strategy it is
essential to have detailed knowledge of
customer preferences.
A price discrimination strategy may be based
on time, quantity, quality aspects, or search
costs. 11 A time-based strategy exploits the
fact that users’ willingness to pay is different
at different times and for different time delays
(e.g. in finding specific offers or pages on the
website). Real-time information is more
expensive than news provided, for example,
with a 15-minute time lag. With quantity-based
price discrimination, the product versions
9
conomics
The information given on a website can also be a means of lock-in.
Participants in C2C auctions assess the reliability of their counterparts
in transactions, for example. Such a rating is potentially more valuable,
the more often the buyer or seller has already traded on the site. This
encourages the user’s loyalty as the cost of switching would be high:
on a new website he would first have to build up a similar rating.
Finally, the bonus programmes that are often used on the internet
also gradually increase the user’s switching costs. Every transaction
between customer and retailer increases the customer’s bonus points,
making it more expensive to switch to another supplier. The rewards
offered to the customer when he has built up a certain number of points
are often selected on the basis of information about the customer’s
preferences which the provider has gathered from his searches and
purchases. If such bonus programmes are widely used, competition
on price will weaken. Merchants will instead concentrate their efforts
on winning new participants for their bonus programme.
Conclusion: consumer behaviour plays a major role
Online shoppers benefit from lower search costs and lower menu costs.
By making intensive use of search engines, shopbots or auctions,
customers can buy more cheaply than in conventional markets.
However, the expectation that this would lead to a general price decline
has only materialised in the case of certain product groups.
The sometimes large differences between prices in electronic trading –
which are unlikely to disappear completely even when the market
matures – indicate that “consumer behaviour“ is a relatively important
component: factors such as brand and awareness, which are regarded
as indicators of a supplier’s trustworthiness, influence buying behaviour
especially on the internet. They help to overcome uncertainty on the
part of the customer due to the separation of buyer and supplier, and
often of the product as well. For customers, online suppliers do differ –
even if they offer absolutely identical products – and the consumer is
willing to pay for this difference.
For suppliers, this opens up new ways of securing customer loyalty
and preventing online prices from falling in the face of tough competition.
Information and product offerings can be adapted to the requirements
of the individual customer, especially through effective personalisation
systems. User guidance that is easy to grasp intuitively is tantamount
to a “cognitive loyalty programme“ and also helps to lock in customers.
The resultant higher switching costs for the customer weaken price
competition among the suppliers as they retain at least part of the
pricing scope which the increased competition threatened to eliminate.
So although the next supplier is theoretically only a mouse-click away,
the internet will not lead to highly price-competitive markets.
Antje Stobbe, +49 69 910-31847 ([email protected]),
with contributions from Mareen Linnert and Oliver Röhn
10
Economics
differ as regards the quantity of units
“consumed“ and the average price per unit.
The contents of online magazines, for instance,
may be sold as individual articles. A look at the
website of a particular business magazine
shows that the price of viewing an individual
article is considerably higher (USD 2.95) than
the unit price if five articles are purchased
(USD 9.95 for five). So if the reader is especially
interested in one article, he has to pay a relatively
higher
price.
Quality-based
price
discrimination is when the prices of different
product versions vary according to the nature
of the individual version (e.g. professional or
student version of software). Search-costbased price discrimination makes use of the
fact that search costs vary for internet users.
Online customers with high search costs prove
to have a higher willingness to pay. On certain
websites customers are able to trigger a
comparison with the prices of competing
providers. One online bookseller wooed
customers by offering them the lowest price if
they clicked a certain button. The customer has
to trigger this process himself, however.
Also, he needs time and information, and the
result is valid only for the current purchase. If
he is under time pressure or finds the process
too complicated, he will give up and pay the
higher price.
Price discrimination strategies lead to
customers’ paying different prices for much the
same product – but from one supplier, not from
different online shops. They are thus a good
illustration of how the technical possibilities of
the internet give merchants new options in
pricing and for increasing earnings. It is also of
advantage for the consumer, as he can choose
between different qualities and different
quantities depending on his willingness to pay.
11
Regarding the possibilities for price discrimination
on the internet see Skiera, B. and M. Spann (2002):
Preisdifferenzierung im Internet, in: Schögel. M.,
T. Tomczak and Chr. Belz (eds), Roadmap to EBusiness – Wie Unternehmen das Internet erfogreich
nutzen, St. Gallen, pp. 270-284.
Frankfurt Voice
More Growth for Germany
On the statutory pension scheme reform
Availab
le faste
r
by e-m
ail!!!
June 30, 2003
Although major demographic challenges still lie ahead, the statutory pension scheme is already floundering. The
high contributions and subsidies needed to finance the scheme are a substantial obstacle to growth and employment. Present misguided incentives for early retirement above all need to be remedied to guarantee sustained
pensions. In this connection proper actuarial deductions are essential on pensions that are claimed early. The
current assurance of a pension level, i.e. a replacement rate, at a minimum of 67 - 68 % until 2030 is also unrealistic. With further cuts in statutory pensions unavoidable, the message to the active generation is clear: to secure
an appropriate standard of living in later life people will have to work harder and take more initiative of their own.
Germany’s entrepreneurial environment: Boom and gloom
for high-tech companies
May 27, 2003
For more than two years now, ever-fewer businesses have been set up in the high-tech segment, but the number
of company failures has been mounting dramatically - a trend driven by the bursting of the bubble on the growth
and VC markets and compounded by Germany’s persistently anaemic growth. - While Germany’s promotion infrastructure makes a good showing by international standards, its promotion schemes could be more clearly arranged. Leaner bureaucracy and simplification of the tax system would also be conducive to business start-ups.
Research and development spending, particularly by the public sector, should be increased, yet at present expenditure is declining. What the country now needs is to create start-up incentives and a sense of entrepreneurship to
prevent a further spread of the Germans’ pessimistic attitude to setting up their own businesses.
Traditional monopolies: growth through
stronger competition
May 7, 2003
A major reason for the persistently weak growth in the EU and Germany is slow progress in deregulating the
economy. For example, there is still too little competition in the energy sector. In the postal services market,
Deutsche Post AG continues to hold a monopoly in the licensed letter segment. Liberalisation is going forward in
telecommunications but still faces major challenges especially at the local level. In the German water industry,
growth potential should be leveraged using competition instruments such as open tenders. In the transport sector,
efforts should focus on pushing ahead with the liberalisation of public regional passenger transport; in rail transport, it is essential to open the national networks across Europe. Only by extensively liberalising the markets in all
sectors will it be possible to increase overall demand and return Germany to the growth path.
The public sector - a clamp on growth
March 18, 2003
In recent years Germany has earned itself a dubious reputation of lagging behind the rest of the EMU
participants in terms of growth. In particular the high level of government spending is curbing growth.
Excessive state consumption and performance-inhibiting transfers in the wrong places are continually
leading towards hardship. To boost growth, subsidies, social transfers and personnel expenses need to
be reduced tremendously. In addition, citizens’ tax and contributions burden must be lowered.
All our publications can be accessed, free of charge, on our website www.dbresearch.com
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conomics
ISSN 1619-3245
B2C e-commerce: internet is no “great equaliser“
More than “pretend competition“ in German telecommunications
The mechanical engineering and automotive industries
- online marketplaces on the advance?
Germany’s broadband networks - innovation on hold
Information & communication technologies - panacea for traffic congestion?
Germany’s venture capital market: prospects remain dim
Free software, big business?
E-government: large potential still to be tapped
Business locations in a networked world - No death of distance
Taxation of e-commerce - looking for solutions
July 2, 2003
April 25, 2003
March 18, 2003
February 17, 2003
December 11, 2002
December 5, 2002
November 22, 2002
October 31, 2002
August 27, 2002
August 1, 2002
Biometrics - hype and reality
May 22, 2002
Technology and work - the 21st century and its challenges
April 29, 2002
Online brokerage in Germany 2002: strategy changes and market shakeout
April 19, 2002
B2C trading in the automotive industry: the internet is primarily
a source of information
April 18, 2002
Framework conditions for e-commerce: all in good order?
February 11, 2002
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