A LONGITUDINAL PRICE COMPARISON FOR MUSIC CDs IN ELECTRONIC AND BRICK-AND-MORTAR MARKETS: PRICING STRATEGIES IN EMERGENT ELECTRONIC COMMERCE

ZOONKY LEE AND SANJAY GOSAIN


Abstract

The Internet has great potential as a medium to reach consumers but we still need to improve our understanding of the impact of IT on information asymmetries governing buyer and seller positions. In this study we are primarily interested in exploring differences in pricing strategies between physical and electronic markets, across product categories and over time, and to understand the reasons for these differences. Choosing a homogenous product -music compact disks, we compare prices, price dispersion and price dynamics on the Internet with ,brick-and-mortar retailers. We collected price information for 21 current-hits and 23 old-hits albums from top five nationally-known brick-and-mortar CD retailers and nine on-line stores, and repeated the data collection one year later. Overall, 905 data points, 572 from the Internet and 333 from brick-and-mortar retail shops were collected. We find that: a) The Internet market continues to show price dispersion despite the apparently near zero search costs for consumers and the growth of market size; b) Brick-and-mortar markets execute more consistent and dominant short-term discount strategies for current-hit albums, and as a result, CD prices for old-hit albums are cheaper in the

Internet market as was found in other studies, but CD prices for current-hit albums in the physical markets are comparable to prices in the Internet market; and c) Price dynamics alter over time with Internet retailers offering cheaper prices for albums and apparently employing more frequent and finer price changes. The results suggest that it is important to look at dynamic price behavior and product portfolio issues when trying to characterize pricing strategy in this media. We propose that IT's role in segmenting customers to extract greater consumer surplus, as well as differences in consumer base and preferences and seller cost structures and differentiation strategies, need to be carefully examined to explain price dispersion and dynamic price behavior.

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