Analysis of Virtual Markets
In our previous articles, we have tried to show that digital markets are not reduced to real markets where information circulates better. They don't have to be markets closer to perfect markets.
In these circumstances, it is not surprising that empirical analyzes of already established digital markets highlight neither more active nor less dispersed prices, neither price elasticity nor greater dynamism in pricing.
It has an inventory of available empirical studies on the functioning of digital markets.
We presented the results of the comparison between real markets and digital markets according to four dimensions:
- The level of prices charged: Is the same product sold at a lower price on the Web?
- Price elasticity of demand: Are consumers more sensitive to price changes on the Web?
- Catalog costs (menu costs): These are the costs required to change prices. Do electronic merchants change their prices more often than real merchants?
- Distribution of prices in digital markets: Is the gap between the highest and lowest price on the Web for the same good decreasing?
Concerning the level of prices charged, the results are uncertain. In 1996 and 1998, prices, similar products and services on the Web were higher than in real markets.
On the contrary, in 1999, even taking into account the costs of delivering goods, prices on the Web appear to be 9 to 16% lower than in real markets.
Regarding the elasticity of demand, the provision of very detailed and easily accessible information that digital markets allow seems to reduce the price sensitivity of consumers that much.
Regarding price dynamics and catalog costs, it has been seen that online merchants make price changes more frequently and on a smaller scale, and offer lower catalogs on the Web.
Finally, with regard to the price distribution on the Web, neither in 1998 nor in 1999 showed any difference in price distribution between the Web and real commerce.
These distributions are very high for both market types. For example, 50% for books and CDs.
Therefore, we conclude that the authenticity of digital markets is mainly due to greater activity and no reduction in various frictions that constrain real markets.
Even if information flows better, it is not primarily used to make markets more perfect in the context of the static balance between supply and demand.
INFORMATION COLLECTION BY SELLERS
The model previously described and discussed, on the one hand, provides consumers with better tools to compare products. On the other hand, it is characterized by the fact that traders have less costly means to adapt prices to demand.
Below we will try to identify a different pattern, closer to what we are currently observing on the Web.
The feature of this model is:
— Consumers do not use Web tools to compare product prices and quality. They use the internet to exchange information among themselves about the features of products (Also these exchanges are only part of the surfer's relationship with each other).
These exchanges create club and fashion influences. It may even cause permanent changes in utility functions.
— Companies use Web tools to learn about consumers and the evolution of their tastes, not to define more complex pricing.
This information is used to segment demand and differentiate their products from actual markets much more effectively.
On the contrary, markets are not becoming more fluid. They are more and more precisely divided into sections.
The structure of the audience (i.e. the distribution of surfers across sites) serves as a guide for customer segmentation. Information collected by web companies can be used to differentiate products and services.
From now on, the term mediation will refer to this mutual learning process between supply and demand.
The reason they allow for this dynamic adjustment between an as-yet-undefined supply and an as-yet-undisclosed demand is that free markets outperform any central scheme that can only achieve static equilibria.
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