![]() Competition effect only dominates when a market changes from monopoly to duopoly. The effect of competition and the effect of consumer search on prices are offsetting. More firms can introduce competition, but can also make consumer search more costly. ![]() ![]() Contrary to standard economic predictions, we find that prices do not always decrease as the number of firms carrying the products increases. This cost may even increase when stores provide partial information or even contradicting information about the products. We find that in online markets, though the cost of obtaining price information is significantly reduced, the cost for consumers to gather product information as well as store information has not changed. Second, we would like to examine the relationship between the number of firms and market competitiveness under such information structure in the internet market. First, we investigate whether it is indeed less costly for consumers to gather information to make purchasing decisions on the internet which include produce and service information as well as prices. A unique dataset of store level and product level information as well as prices and aggregate sales for new fiction books is obtained from Tmall (Site 1), the largest Business-to-Consumer (B2C) online platform in China. Motivated by these findings in the literature, the current study explores online sellers’ strategic behavior and the relationship between the number of firms and market competitiveness. Thus, sellers can conduct more frequent price adjustments and adopt various promotional strategies that increase consumer search cost. Moreover, price adjustment becomes almost costless on the internet. Meanwhile, the costs for sellers to observe market demand and rivals’ prices are significantly reduced. The costs for consumers to evaluate products and compare stores increase as more firms enter market. ![]() Generally, unlike shopping at traditional brick-and-mortar stores, online shopping faces greater product and service uncertainties as consumers must determine their preference without observing product quality. find that online sellers often don’t display shipping fees until consumers reach the final purchase page. In particular, they found that online retailers may show lower priced products on price comparison websites to attract consumers but show higher quality and thus higher margin products once consumers arrive on their websites. For example, Ellison and Ellison suggest that although the internet facilitates price search, it also allows firms to adopt a number of strategies to complicate search. There have been studies that explore the effect of information asymmetry in the internet market and challenge the argument of frictionless search. In other words, the increase in the number of sellers would reduce both price and price dispersion. As the number of sellers increases online, if consumers have perfect and complete information, price competition is expected to increase, leading to perfect competition and price convergence. Compared to searching across brick-and-mortar stores, it is much easier for consumers to obtain price information in the online market. The rapid growth in the use of the Internet over the last few decades has been driving consumers and sellers to encompass more online transactions. ![]()
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