Journal Article

Pricing, Sunk Costs, and Market Structure Online: Evidence from Book Retailing

Simon Latcovich and Howard Smith

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 17, issue 2, pages 217-234
Published in print June 2001 | ISSN: 0266-903X
Published online June 2001 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/17.2.217
Pricing, Sunk Costs, and Market Structure Online: Evidence from Book Retailing

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While online consumers are less concerned than traditional consumers about firm location, they may be more concerned about unobservable quality and, to signal this, online retailers rely more on advertising than traditional retailers. Imperfect price competition may arise because of vertical product differentiation, incomplete consumer awareness, and near‐perfect information exchange between retailers. This paper evaluates alternative theories of competition and market structure in online retailing. Advertising, product development, and revenue data for the online book market reveal that consumers respond to advertising and website spending rather than low prices. As the market size expanded, during 1997–2001, these endogenous sunk costs escalated and there was no major new entry. Advertising‐to‐sales ratios and market‐concentration ratios are much higher than for traditional bookselling. Using price and demand information for individual books over a number of weeks, we find counter‐cyclical and cross‐sectional price variation inconsistent with perfect price competition.

Journal Article.  0 words. 

Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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