Competitive Dynamics of Online and Brick-and-Mortar Retail Prices

This paper analyzes the competitive interplay of prices amongst retail channels: offline (brick-and-mortar) and online (such as retailers’ websites and online marketplaces). We find evidence of a close competitive relationship between the two channels, in which prices correspond tightly across channels. We find that prices are highly responsive to changes in the other channel; in other words, when offline prices increase (or decrease), online prices tend to respond by also increasing (or decreasing). This means that consumers online face similar pricing trends to consumers offline, and the competition between different retailers and across channels is vigorous.We specifically find that online prices are more responsive to brick-and-mortar prices than the reverse, which is consistent with the technological capacity for online prices to adjust more rapidly than brick-and-mortar price tags. Both brick-and-mortar and online prices react similarly when they are the lower price, and tend to adjust upwards. But their responses are clearly different when they are the higher price: brick-and-mortar prices will tend to stay high, while online prices will be pulled down to lower levels. This is consistent with intense price competition both within and across retail channels. For the set of products analyzed at the national aggregate level, we also find that both channels experience increases and decreases in dollar sales at the same time and to the same degree. This is consistent with the idea that both channels are subject to the same market forces. Evidence in the literature demonstrates a close correspondence between prices online and in brick-and-mortar stores. This paper provides additional evidence in support of this finding, and expands on the current literature by providing evidence regarding price transmission and dynamics. Of relevance for competition and regulation, our findings suggest that competition among retailers and across retail channels is intense, that they respond quickly to each others prices and that, as a consequence, regulation affecting online commerce is expected to affect prices in brick-and-mortar stores, and vice versa. The increasing popularity of omnichannel shopping, whereby consumers mix and match online and offline components of their shopping journey, also may encourage convergence between online and offline prices