The Impact the Increasing Prevalence of Online Shopping Will Have on Sellers Ability to Implement Price Discrimination - Essay Example

With detailed reference to all the theoretical analysis you deem pertinent, assess the likely impact the increasing prevalence of online shopping will have on (1) sellers’ ability to implement price discrimination, and (2) welfare and efficiency in goods. Introduction: The free market has permitted and supported the Internet to develop into a megalopolis of business. The National Retail Federation had predicted that online stores and additional e-commerce websites would have enhanced a 20 percent year-to-year augmentation in gross sales in 2006 – approximately $211.4 billion in retail sales. This has permitted for a paradigm transfer in the activities of commerce and competition (Miyazaki and Fernandez, 2006, p. 1). The ascendance of the Internet as a distribution conduit has had a substantial impact on business in the majority of zones. In reality, the Internet has turned out to be an efficient means of commerce for a variety of products such as books, CDs, and electronic equipment. The online retailers have radically changed specific markets within a few years (Galarza and Gissler, 2009, p. 4). The present study seeks to assess the likely impact of online shopping on sellers’ ability to implement price discrimination and on social welfare and efficiency. Impact of online shopping on the sellers’ ability to implement price discrimination: In case of intertemporal price discrimination a number of the pricing issues are linked with general tracking technologies. Models of repetitive interfaces between sellers and their clients are applied in which sellers apply a variety of information technologies to locate clients over time (for example, Internet “cookies” in online shopping), and clients use strategies (for example, delaying acquisitions, choosing a different dealer, or accepting anonymizing or privacy technologies) to circumvent being tracked. The models emphasized the conditions under which sellers find it optimal to utilize tracking data about their clients for price discrimination, and the conditions under which clients find it optimal to disclose or hide their individualities (Acquisti, 2005, p. 2). By tracking and assessing individual consumer data, sellers can put into practice interactive marketing strategies and propose to each person a personalized offer. In particular, vendors can utilize customer information (combining situation, historical, setting and individual data) for price discrimination. A fascinating result in the micro economic literature, however, demonstrates that price discrimination is not an optimal approach when the vendor can commit to prices and customers have stationary valuations for the good: intertemporal price discrimination cannot surpass fixed prices strategies. Acquisti and Varian illustrate that the same outcome applies when clients can be personally tracked through information technology. They applied a simple model of dynamic pricing that can be applied to the ubiquitous computing tracking situation, with a sole profit-maximizing vendor of a good that can be offered at zero marginal cost. The seller has some method of identifying, tracking, and recording buying accounts of clients (Acquisti, 2005, p. 5; Varian, 2006). It is assumed that the clients are sane and onward looking. The customers are aware of there present behavior that will have an effect on the vendor’s future preferences. It is supposed that the analysis is restricted to 2 shopping opportunities. In other words, it is presumed that customers visit the store (the ubiquitous computing commerce environment) maximum two times. When they come to the seller for the 1st time, their personal information or ID is registered, and a price for the commodity of interest to the customer is offered. The customer’s decision about whether to buy at that price is viewed and recorded by the vendor. The 2nd time the customer comes into the same ubiquitous computing location for another acquisition, the price he is presented can be formed on her previous behavior (recorded by the system and coupled with the consumer ID). The vendor could set a flat price at each time (either pricing at the lower estimation, getting all clients; or at the higher estimation, getting only the high estimation clients). Or, the vendor may alter prices dynamically across the 2 shopping alternatives, “conditioning” them on the response of clients to the prices in the 1st period. Since high-value forward looking customers will understand that buying at a high price may ensure that they will face a high price in the future, they may take up some anonymizing knowledge to evade establishing a purchase account or they may just delay acquisition (by declining an offer at a definite price in the 1st purchasing experience). For this model, Acquisti (2005) and Varian (2006) establish that there is one not subjugated discriminatory pricing strategy for the vendor. This makes the high value consumers to purchase in both the periods and the low valuation type consumer to acquire only in one period. It also reveals that the yield from the discriminatory policy never goes beyond the profit from flat pricing. When selling to high-value clients is more lucrative than selling to every customer at the lesser price, the vendor will prefer to only sell to high-value customers at the high price (rather than offering discounts to also magnetize the low valuation type). In other words, it seems that utilizing tracking data for price discrimination may not bring about higher profits for the vendor (Acquisti, 2005, p. 6; Varian, 2006; Estrin and Laidler, 1995). A vendor able to track customers over repetitive transactions and condition prices depending on preceding purchase accounts may have more than a few different accessible strategies: flat-pricing to all customers or just to the high-value customers, or adopt pricing policies that encourage conditioning. In the latter situation, the vendor may decide to offer improved services to all customers visiting the vendor’s store a 2nd time, or just to the customers who already bought on that store. Based on its insights of how many high and low value customers exist in that economy, and how much each type of customer is prepared to pay for the commodity, the vendor can select its offerings in order to make the 2nd purchase or visit an improved experience, depending on which is more money-spinning (Acquisti, 2005, p. 11). So far we have evaluated price discrimination policies that inflict separating equilibria: low type customers buy once, and high type customers buy twice a repetitive purchase commodity. Customer tracking data however can also be utilized for price discrimination without this type of rationing, when the vendor is able to present new but related commodities at each visit. This strategy has the benefit for vendor (but a disadvantage for the purchaser) of making price discrimination less noticeable. It is because purchase accounts are applied to contrast prices of different commodities. This strategy is mainly relevant to ubiquitous computing commerce settings in which multiple related commodities may be provided in the identical physical or virtual space (Acquisti, 2005, p. 13-14). Impact of online shopping on the welfare and efficiency in goods: Lower search expenses in digital markets will make it simpler for the purchasers to find low-cost vendors, and thus will promote price competition among vendors. This outcome will be the most enunciated in the market for commodities, where declining purchasers’ search expenditures may bring about intensive price competition wiping out any unusual vendor profits. It may also be vital in markets where commodities are differentiated, decreasing the monopoly power enjoyed by vendors. It leads to lowering of the profit of the vendors and thereby enhancing efficiency and the total welfare. A number of online markets may have lower limitations to entry or smaller competence scale, thus causing a larger number of vendors at equilibrium, and correspondingly, lesser prices and advantages. It may thus be anticipated that online markets will have stronger price competition, which will result in decreasing of profits as well as passing to customers of savings to low cost frameworks. For instance, online shoppers may anticipate a 20-30 percent discount of goods usually priced $30-500 (Bakos, n.d., p. 3). E-commerce enables retail markets to utilize new kinds of price discovery methods, further complicating the plausible dynamics of marketplace competition. Web-based auctions at Onsale.com have given birth to markets for consumer products such as, computers that operate in the way resembling financial markets. Intermediaries such as, Priceline.com allow the purchasers to make offers to vendors repealing the usual pricing dynamics of retail markets. The capability of enforcing different price methods in some situations may result in more proficient markets and thereby benefit all the members and enhance the total welfare. In other situations, it may bring about reduced advantages from trade (Bakos, n.d., p. 7). The question crops up that whether the electronic market highlights comparisons of prices or of commodity characteristics. A technique designed to support price shopping would facilitate acquiring price details, but might still necessitate a higher-cost investigation to acquire complete information of the product. For instance, a purchaser searching a computer monitor can effortlessly compare prices from a large number of vendors by relating to Internet price search engines for example, Shopper.com or Pricewatch.com, however, may face an increased cost in acquiring product details. In this situation, the purchaser must acquire and assess the monitor’s requirements, evaluate the vendor’s reputation and return strategies, and preferably locate a display model at an outlet (Bakos, n.d., p. 8). Today, payment cards are essential in most sophisticated economies. Payment cards provide benefits to customers and businessmen in terms of security and income insurance. Groundbreaking payment solutions, for example, online payments, are also expected to alter clients habits. In general, recent developments and alterations in the payments market exhibit great chances and potential for non-cash payments (Bolt and Schmiede, 2009, p. 1-4). Retail payment systems put up with significant uniqueness of 2-sided markets. That is, the utilization of card payment services involves 2 sides of the transaction- a customer and a merchant- each of whom takes actions, have advantages, and incurs expenditures. Economic theory has portrayed that fixing the correct price structure (for example, the ratio of the customer fee and seller fee) is vital for customer card usage, seller acceptance decisions, and consequential heights of economic welfare and efficiency. Interchange fees can be observed as tools to achieve this optimal price arrangement, and to offer basic incentives to ensure the contribution of all parties in the card payment structure. An imperative lesson of this evaluation is that the socially optimal customer, vendor and interchange fee will rely on both advantages and costs comprehended by each side of the business deal. Hypothetically, purely cost-based seller fees or zero multilateral interchange fees (MIFs) are implausible to reach full efficiency. Profit-maximizing payment fees can be profoundly skewed to one area of the market. Characteristically, businessmen are less price-elastic than cardholders, and often put up with the entire burden of joint payment expenditure. However, this does not essentially contradict a communally efficient market outcome (Bolt and Schmiede, 2009, p. 8). Shopping websites permit clients to select products based on their own requirements and then offer businesses dealing platforms through interactive contacts to perform the transactions. Technology and function provided by website operatives undoubtedly involve online customer welfare and expediency in regard to their online purchasing actions. Therefore, shopping websites should offer proper website-associated functions in line with the clients’ needs. This lets the clients to put aside more time and effort but have a higher shopping effectiveness, resulting in improved customer satisfaction in addition to loyalty. The shopping website can be made trouble-free and easy to comprehend in order to decrease the client’s shopping time and make Internet shopping more effectual. Website operatives can also recommend clients with more thorough information, to allow them to be more comfortable in buying from the website and to augment the product’s utility. Moreover, the contents of the shopping website can incorporate product information, product advantages and drawbacks, product usage and preservation, etc. And, shopping website design must be fascinating and interactive, so that clients can enjoy in their buying procedure more and perhaps can assemble products for easier evaluation. These enable clients to purchase more professionally and, simultaneously, amplify not only their e-contentment but also their online shopping frequency (Factors Influencing Satisfaction and Loyalty in Online Shopping: An Integrated Model, n.d.). There are several grounds to consider that retail e-commerce will in general enhance social welfare. It will provide advantages to customers by helping them to get the benefit of reduced prices and more alternatives. The savings on search expenses for purchasers and vendors are expected to be considerable. In markets with distinguished customer tastes, reducing search costs can decrease “fit” costs generating from customers making suboptimal commodity choices. In addition, augmenting the number of product offerings can bring about a top class increase in welfare. This result should be held true when the extra customization or versioning can be offered at a very low or zero marginal costs. Even price discrimination and augment social welfare by amplifying the number of purchasing customers, and thereby lowering the deadweight loss. Likewise, bundling a huge number of information products may enhance overall welfare by decreasing deadweight loss. The enhanced efficiency is anticipated to offer adequate social advantages for both customers and producers to benefit. However, the question of who gets the advantage by how much remains to be worked out. A number of customers may pay lesser prices. Others may not pay lesser prices, but still benefit in expediency or breadth of choice. Yet the other customers will view some of their surplus confined by retailers through price discrimination. These prototypes will diverge across kinds of products and also time. In the short run, the advantages might be confined to the vendors who are considered to be the early movers on retail e-commerce. However, after a certain point of time, these benefits will probably be worn away by competition (Bakos, n.d., p. 13). Conclusion: Ubiquitous calculating technologies provide retailers new alternatives to interrelate with their clients. Aggregating and evaluating purchase and individual data, sellers can not only offer modified services, targeted offers, but also utilize dynamic pricing strategies. In this study micro economic theory has been applied to talk about under what conditions it may seem right for retailers to utilize ubiquitous computing tracking technologies to inflict price discrimination (Acquisti, 2005, p. 15). The progress of the Internet into a mass medium for business is in reality more or less merely the digitalization through methodological innovation of other modes of distant purchasing, such as via telephone or mail-order. These come with the identical risks of privacy and safety. The Internet has many protections, such as encryption that make the theft of the information much more difficult than in the conventional phone or mail-order settings. Any envelope can be misrouted or unwrapped by an unprincipled individual that will use the information for his or her personal gain (Miyazaki and Fernandez, 2006, p. 2). E-commerce will certainly remain an expansion market for several corporations for many years to come as the propagation of Internet services goes on to spread to underserved areas (Miyazaki and Fernandez, 2006, p. 5). References: 1. Acquisti, A, January 2005. “Ubiquitous Computing, Customer Tracking and Price Discrimination”. Available at: http://www.heinz.cmu.edu/~acquisti/papers/acquisti-ubiquitous.pdf (Accessed on December 15, 2009). 2. Bakos, Y, n.d. “The Emerging Landscape for Retail E-commerce”. Available at: http://pages.stern.nyu.edu/~bakos/retail-ecommerce.pdf (Accessed on December 15, 2009). 3. Bolt, W, Schmiede, H, May 11, 2009. “SEPA, Efficiency and Payment Card Competition”. Available at: https://www.ecb.int/events/pdf/conferences/integr_innov/bolt_schmiedel_paper.pdf?80996d55c09373ee0000d67785193d64 (Accessed on December 15, 2009). 4. Estrin, S, Laidler, D.E.W, 1995. Introduction to microeconomics. Harvester Wheatsheaf (Warwickshire). 5. “Factors Influencing Satisfaction and Loyalty in Online Shopping: An Integrated Model”, n.d. Available at: http://ibacnet.org/bai2007/proceedings/Papers/2007bai7470.doc. (Accessed on December 15, 2009). 6. Galarza, A.F, Gissler, C, March 2009. “Selective Distribution of Branded and Luxury Products and the Conjuncture of Online and Offline Commerce in the Light of the European Commision’s Revision of the Vertical Restraints Regime”. The Online Magazine for Global Competition Policy. Available at: http://www.mayerbrown.com/publications/article.asp?id=6341&nid=6 (Accessed on December 15, 2009). 7. Miyazaki, A.D, Fernandez, A, October 28, 2006. “Consumer Perceptions of Privacy and Security Risks for Online Shopping”. Available at: http://www.jasonlangsner.com/extra/papers/Langsner_InternetPrivacySecurity.pdf (Accessed on December 15, 2009). 8. Varian, H, 2006. Intermediate Microeconomics: A Modern Approach. W.W. Norton & Co. (New York). Read More