Wine Online: Search Costs Affect 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, online services, or interactive television (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. Some 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. They also 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 three 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 uniquewines. 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 was 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 two months later and invited to continue using the electronic shopping service from home. Fourth, we examined the implications of these results for manufacturers and examined 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 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) WINE ONLINE: SEARCH COSTS AFFECT COMPETITION ON PRICE, QUALITY, AND DISTRIBUTION 84 Marketing Science/Vol. 19, No. 1, Winter 2000 Introduction Emerging electronic channels create a fundamental dilemma for retailers with stand-alone sites on theWorld 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 lowermargins 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 so 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 crossstore 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 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 fixated on the potential for electronic shopping to lower search costs for price information and to heighten competition. This drove them to create defensive, toe-in-the-water interactive offerings with few benefits to consumers, opening the door to new, electronic competitors such as Amazon, e-Toys, etc. Arguably, this response misanalyzed the effects of lowered search costs in the short run (i.e., the consumer’s For anecdotal support, e.g., Krantz (1998, p. 40), Downes and Mui (1988, p. 88), Steinhauer (1998), Wigand and Benjamin (1995). 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. (1997) and Bakos (1997) made the point that electronic shopping does not just lower the cost of search for price information. Independently, it can lower the cost of search for quality information, decreasing price sensitivity. Alba et al. argued that consumers also value the potential for electronic shopping to lower search costs by a third route. By supporting comparisons across merchandise sold by competing vendors, electronic shopping increases consumers’ ability to choose merchandise that will maximize consumption utility (Häubl and Trifts, this issue). We therefore add to our investigation the impact of interstore comparison on the benefits of interactive shopping systems and consumer price sensitivity. As other analysts have suggested, we expect that making interstore comparisons easier should increase price sensitivity for items carried by multiple comparable stores. We expect to find, however, that this result will not hold for differentiated merchandise sold exclusively by one retailer. Moreover, if the stores differ in the information they offer, in their appearance, or in the benefits they provide, the additional information consumers will derive from interstore comparison may result in decreased price sensitivity. Alba et al. (1997; see also Quick 1998a,b) noted that third-party efforts to provide cross-shopping services can be hamstrung if retailers refuse to cooperate in providing relevant information. Theymaintained, though, that in the long run, efforts by electronic merchants to make cross-shopping difficult are doomed to failure, removing much of what makes the electronic venue more appealing than other retail formats. Moreover, if consumers value the benefit of cross-shopping online, some other entrants will offer it (e.g., www.autoby tel.com, www.bizrate.com, www.compare.net, www .killerapp.com, www.mysimon.com, www.personal logic.com, www.weddingchannel.com, www.wire lessdimension.com, and www.zdnet.com), and consumers will demand it (Erlich and Fisher 1982). Consumers may choose to patronize those sellers who deliver this benefit, bypassing those who do not.