E-commerce can force up prices

Internet commerce, rather than spurring competition between firms and pushing down prices, could actually be "bad for consumers" by making goods more expensive, an academic study has claimed.

According to US university researchers, empirical studies have failed conclusively to prove that internet retailers are cheaper, with prices on the web sometimes no better than bricks-and-mortar competitors'.

"We are challenging the conventional wisdom and showing that making it easier for consumers to compare prices on the web may actually result in higher prices and reduced consumer welfare," said Waleed Muhanna, co-author of the study and associate professor of management information systems at Ohio State University's Fisher College of Business.

Muhanna conducted the study with Colin Campbell of Rutgers University and Gautam Ray of the University of Texas at Austin. The results appear in the March 2005 issue of Management Science.

The researchers used a complex game-theoretic analysis to reach their conclusions, but Muhanna explained that the reasoning is relatively simple.

The same web technology that allows consumers to compare prices on a product from several different businesses also allows these businesses easily to check on their competitors.

This means that businesses cannot reduce their prices without competitors finding out quickly, and possibly matching or beating those prices. The result is that businesses selling on the web have no incentive to undercut their rivals, according to Muhanna.

"If I know you can nearly instantly detect my attempt to undercut your prices, and that you will match or beat the new price almost immediately, there is a lot to lose," he said.

"It could trigger a price war that would hurt us both. The incentives are such that businesses keep prices higher than they would otherwise be if they were not able easily to monitor each other's actions."

In effect, competitors are involved in a "tacit collusion" to keep prices stable, explained Muhanna.

This means that e-commerce firms do not co-ordinate with each other or even agree with each other to prop up prices, but the effect is the same as if they did.

"It is as if they had got together to co-ordinate prices, but each is acting independently in their own self interest," said Muhanna. "They are agreeing to maintain a cartel-like pricing arrangement without explicitly co-ordinating it."