Wine Online: Search Costs and Competition on Price, Quality, and Distribution

A fundamental dilemma confronts retailers with stand-alone sites on the World Wide Web and those attempting to build electronic malls for delivery via the Internet, on-line services, or interactive TV (Alba et al. 1997). For consumers, the main potential advantage of electronic shopping over other channels is a reduction in search costs for products and product-related information. Retailers, however, fear that such lowering of consumers’ search costs will intensify competition and lower margins by expanding the scope of competition from local to national and international. Retailers’ electronic offerings have been constructed to thwart comparison shopping and to ward off price competition, dimming the appeal of many initial electronic shopping services. Ceteris paribus, if electronic shopping lowers the cost of acquiring price information, it should increase price sensitivity, just as is the case for price advertising. In a similar vein, though, electronic shopping can lower the cost of search for quality information. Most analyses ignore the offsetting potential of the latter effect to lower price sensitivity in the current period and ignore the potential of maximally transparent shopping systems to produce welfare gains that give consumers a long-term reason to give repeat business to electronic merchants (cf. Alba et al. 1997, Bakos 1997) We test conditions under which lowered search costs should increase or decrease price sensitivity. We conducted an experiment in which we varied independently 3 different search costs via electronic shopping: search cost for price information, search cost for quality information within a given store, and search cost for comparing across two competing electronic wine stores. Consumers spent their own money purchasing wines from two competing electronic merchants selling some overlapping and some unique wines. We show four primary empirical results. First, for differentiated products like wines, lowering the cost of search for quality information reduced price sensitivity. Second, price sensitivity for wines common to both stores increased when cross-store comparison is made easy, as many analysts have assumed. However, easy cross-store comparison had no effect on price sensitivity for unique wines. Third, making information environments more transparent by lowering all three search costs produced welfare gains for consumers. They liked the shopping experience more, selected wines they liked more in subsequent tasting, and their retention probability was higher when they were contacted 2 months later and invited to continue using the electronic shopping service from home. Fourth, we examined the implications of these results for manufacturers, and how market shares of wines sold by two stores or one were affected by search costs. When store comparison was difficult, results showed that the market share of common wines was proportional to share of distribution, but when store comparison was made easy, the market share returns to distribution decreased significantly. All of these results suggest incentives for retailers carrying differentiated goods to make information environments maximally transparent, but to avoid price competition by carrying more unique merchandise. (Buyer Behavior, Competitive Strategy, Internet Marketing, Price Sensitivity, Retailing) Emerging electronic channels create a fundamental dilemma for retailers with stand-alone sites on the World Wide Web and for those attempting to build electronic malls for delivery via the Internet, online services, or interactive television. Alba et al. (1997) present the case that, for consumers, the main attraction of interactive electronic retailing is a reduction in search costs for products and product-related information. However, it is precisely this lowering of search costs that retailers fear most. Their concern is that electronic retailing will intensify competition and lower margins by expanding the scope of competition from local to national and international (Anders 1998, 1999; Economist 1999; Gove 1999; Kuttner 1998; Quelch and Klein 1996; Reeve 1998; Trudeau 1999). Established retailers seem to view these emerging channels as inevitable but potentially lethal. They therefore configure their individual electronic stores such that it is difficult to compare their merchandise with that of other stores selling on the same channel. In addition, when third-party agents like Anderson Consulting’s Bargain-Finder are created to facilitate cross-store electronic search, merchants attempt to block them from their sites (Bakos 1997; Pazgal and Vulcan 1998; Quick 1998b). When infomediaries invite multiple retailers to participate in electronic markets, the large and established retailers resist, preferring to have their own individual sites (Bounds 1999). Thus, we see the three interrelated themes of fear of price competition, fear of comparison shopping, and perceived disincentives for electronic retailers to cooperate in lowering cost of search for information consumers might desire. Our paper presents an empirical analysis and extension of the ideas suggested by Alba et al. (1997) and Bakos (1997). Alba et al. argued that conventional retailers fixate on the potential for electronic shopping to lower search costs for price information and to heighten competition. This has driven them to create defensive, toe-in-the-water interactive offerings that have few benefits to consumers, opening the door to new, electronic competitors such as Amazon, e-Toys, etc. 1 Arguably, this response misanalyzes the effects of lowered search costs in the short run (i.e., the consumer’s first transaction with an electronic interface) and in the long run, ignoring how lowered search costs might affect the customer’s lifetime value. Consider first how the consumer might be affected by search costs on the first transaction with an electronic merchant. Both Alba et al. and Bakos made the point that electronic shopping does not just