The Emerging Landscape for Retail E-Commerce Yannis Bakos The ...

Yannis Bakos 79and more choices. The savings on search costs for buyers and sellers are likely to besubstantial. In markets with differentiated consumer tastes, lowering search costscan reduce "fit" costs resulting from consumers making suboptimal productchoices (Bakos, 1997). Also, increasing the number of product offerings can resultin a first-order increase in welfare (Hotelling, 1929; Salop, 1979). This result shouldhold especially true when the additional customization or versioning can be providedat very low or zero marginal costs. Even price discrimination can increasesocial welfare by increasing the number of purchasing consumers, and thus reducingdeadweight loss. Similarly, bundling large numbers of information goods mayincrease total welfare by reducing deadweight loss (Bakos and Brynjolfsson, 1999).The increased efficiency is likely to provide enough social gains for bothconsumers and producers to benefit, but the question of who benefits by how muchremains to be worked out. Some consumers may pay lower prices. Others may notpay lower prices, but still benefit in convenience or breadth of selection. Still otherconsumers will see some of their surplus captured by retailers through pricediscrimination. These patterns will surely vary across types of goods. They may alsovary across time: in the short run, benefits may be captured by the sellers who areearly movers on retail e-commerce, but after a time, those benefits are likely to beeroded by competition. Economic researchers, businesspeople and consumers allhave a deep interest in how these forces will work themselves out.ReferencesAkerlof, G.A. 1970. "The Market for 'Lem- dling Information Goods: Pricing, Profits andons': Quality Uncertainty and the Market Mech- Efficiency." ~Mnnagement Science. December, 45:anism." Quarterly Journal of Economics. 84, pp. 488- 12.500. Bakos, Y. and E. Brynjolfsson. 2000. "Aggre-Amihud, Y. and H. Mendelson. 1986. "Asset gation and Disaggregation of InformationPricing and the Bid-Ask Spread." Journal ofFinan- Goods: Implications for Butldling, Site Licenscia1Economics. December 223-249.ing and Micropayment Systems," in Internet Pub-Amihud, Y., H. Mendelson and B. Lauterbach. lishing and Btyond: The Economics of Digztal Infor-1997. "Market Microstructure and Securities Valmationand Intellectual Proprrfj. Brian Ihhin andues: Evidence from the Tel Aviv Stock Ex-Hal Varian, eds. Cambridge: MIT Press, August.change." Journal of Financial Economzcs. Septem-Bank, D. 1999. "A Site-Eat-Site World." Wallber, pp. 365-90.Street Journal, July 12, p. R30.Bailey, J. P. 1998. "Electronic Commerce:Brynjolfsson, E. and M. Smith. 2000. "Fric-Prices and Consumer Issues for Three Products: tionless Commerce? A Comparison of Internet Books, Compact Discs, and Software." Organisationfor Economic Co-operation and DevelopandConventional Retailers." Management Science. ment, OCDE/GD(98)4.April, 46:4.Bakos, Y. 1997. "Reducing Buyer Search Costs: Clemons, E. K., I. Hann and L. M. Hitt. 1998.Implications for Electronic Marketplaces." Man- "The Nature of Competition in Electronic MaragementSciace. December, 43:12.kets: An Empirical Investigation of On-lineBakos, Y. and E. Brynjolfsson. 1999. "Bun- Travel Agent Offerings." Working Paper, The