Abstract:
E-commerce has initially raised the expectations that it would at last be the realization of the perfect competition commonly assumed in economic theory - efficient, frictionless markets under perfect information. It was soon clear that such expectations would not be met. The new form of publicity provided by the online channel is, however, a drastic change. In the first place, e-commerce enables a wider scope of publicity for firms, so that they can address more consumers. This is at the core of our first model, which consists in the extension of a classical search model to e-commerce as an additional market layer. In a second place, e-commerce offers the possibility for firms to gather more information about their consumers, so that the search effort is shifted from the consumers to the firms. These two models address specifically the question of a cannibalistic behavior of firms; as well the consideration of e-commerce as a new channel as the consideration that the search effort is incurred by the firms lead to a redistribution of welfare from the firms to the consumers and to a constriction of the traditional channel, but not to its extinction. Finally, e-commerce increases the transparency about firms’ pricing strategies, so that competitors as well as consumers can form more accurate expectations about these strategies. Such an e-commerce-driven phenomenon is the publicity about Black Friday; in our third model, we show that this publicity, and the consumers’ expectation that firms will offer such a calendar price discount, make it optimal for firms to stick to this pricing strategy. The model does not ex-plain the apparition of such a pricing strategy, but it shows how the mere publicity about it explains its perpetuation. All three models show how the new quality of publicity in the online channel impacts the behavior of consumers and firms; the models focus hereby at the role of time – search time as an opportunity cost, timing decision of consumers when they decide whether to go on searching or whether to wait for a calendar price discount.
searching costs