Wall Street Journal - October 18, 1999
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Wholesale Numbers Rattle Shares And Give Skeptics Fresh Ammunition
By JACOB M. SCHLESINGER Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- So has the New Economy slain inflation, or not?
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Even the nation's top inflation cop, Mr. Greenspan, apparently isn't quick to seize the Web's bargains. Surfing the Net recently, he found he could get a videocassette recorder for less than his local electronics store was charging. But he ended up buying from the store without even haggling, concluding it wasn't worth the fight, friends say he told them. Shopping, he likes to tell colleagues, is as much about entertainment as cost cutting. He underlines the point by relating the time his wife, television reporter Andrea Mitchell, told him on a trip that she was going shopping. "For what?" Mr. Greenspan asked. "You don't get it, do you?" Ms. Mitchell retorted.
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'Frictionless Commerce'
Among the small but growing band of economists who are rigorously examining the macroeconomic implications of e-commerce, a school of enthusiasts argues that the Web is becoming a laboratory for so-called frictionless commerce. "The emerging digital economy ... constitutes a grand experiment," MIT's Messrs. Brynjolfsson and Smith argue in a recent paper written with Joseph Bailey of the University of Maryland. With consumer search costs plunging and retailer access to once-off-limits markets soaring, the emerging digital economy will put many pure market theories to the test.
Messrs. Brynjolfsson and Smith acknowledge that their work also undercuts the theory of perfect competition on the Web. While prices, overall, were lower on the Web in the sectors they studied, there were also huge disparities in the prices charged for the exact same goods -- and the players with the biggest market share weren't always charging the lowest prices. At one point in his study, both Amazon.com and Borders.com were charging $17.47 for Suze Orman's book "The Courage to Be Rich," while Barnes & Noble's Web site was charging $17.46, or just a penny less. None seemed worried that three smaller sites were charging under $15, or more than 10% less, for the same book.
More important, the Internet actually makes it much easier for retailers to prey on these differences between consumers -- to give the discounts to those who really want them, but only those who really want them -- and to keep prices high, or even raise them, for those who are less price-sensitive. Retailers can collect more information than ever before about customer preferences. Academics call this "price discrimination."
Mr. Clemons, the fedora-sporting Wharton professor, recently completed a study on the success of online travel agents in preventing a full-scale price war for airline tickets. One company alone, which Mr. Clemons declined to identify, owned two such different agents: a discounter that was complicated to use, meaning that only travelers with lots of time would go to it; and an easy-to-use program that sold only the higher-priced tickets for time-pressed business travelers. One result: Even accounting for differences in ticket quality -- such as layovers and connections -- prices varied by as much as 18% across travel agents.
"Economists were offended by this," Mr. Clemons says. "They said it can't be stable -- the Internet must provide perfect competition." His response: "It isn't. If a product is complex enough, sellers can avoid competition by serving different customers."
--Tristan Mabry and Sarah Lueck contributed to this article.