SINKING THE INTERNET: PRICING, SUNK COSTS, AND MARKETSTRUCTURE ONLINE

This paper evaluates alternative strategic models of competition and market structure inonline retailing, and makes comparisons with traditional retailing. Online consumers areless concerned than traditional consumers about spatial characteristics and moreconcerned about hidden quality characteristics. Online retailers rely more on advertisingthan traditional retailers do, to inform consumers and to signal hidden quality attributes.Price competition may be imperfect, because of vertical product differentiation,incomplete consumer awareness, and perfect information exchange between retailers.Advertising and revenue data for the online book market reveal that consumers respondto advertising rather than low prices. As the market increases, advertising costs escalateand there is no new entry. Advertising to sales ratios and market concentration ratios aremuch higher than for traditional retailers. Using price and demand information forindividual books over a number of weeks, we find counter-cyclical and cross-sectionalprice variation inconsistent with perfect price competition....<br<