ITR: Industrial Organization of Internet Industries

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Proposal 0219205 ITR: Industrial Organization of Internet Industries Glenn Ellison, Massachusetts Institute of Technology This project investigates a number of new businesses that have been spawned by the growth of the Internet: price search engines, online retail stores, and online auction sites. Several components of the project involve the construction and examination of a new dataset which includes high frequency pricing data from one online retail market, sales data from one of the firms operating in the market, wholesale cost data, and prices from traditional retailers which compete with the online firms. One part of the project will study the demand environment that price search engines create and whether demand becomes so price sensitive that firms are unable to cover their fixed costs. It explores practices of online retailers that may help them to avoid this outcome, including obfuscation in search markets and loss-leader pricing. A second part of the project will explore the sensitivity of online purchases to sales taxes and to differences between online prices and prices in traditional retail stores. This analysis exploits data on the location of consumers and differences between pre-tax and after-tax ranking of each retailer. A third part is an examination of how retailers react to cost shocks and rivals' price changes and how these reactions and the entry of new firms have combined to produce the observed evolution of price-cost margins. The last component of the project will study competition between online auction sites. It will consist primarily of theoretical analyses of the factors that may allow one site to remain dominant even as the overall market grows. The results of these studies should improve understanding of the emerging internet industries. They are very directly relevant to some current public policy questions, such as whether taxes should be imposed on internet transactions and how this might affect both the viability of internet businesses and traditional retailers. By improving understanding of these industries they may also enlighten future debates that arise and help private firms direct investments efficiently. On a more general level the studies can be seen as using a unique opportunity that the internet provides to improve understanding of issues that have been and will remain important in many industries: how search costs affect pricing and market efficiency, how attempts to sell add-ons and a desire to keep consumers from focusing on price differences affects competition, and how repetition and the entry of new firms affects pricing.