Increased price transparency

Quelch and Klein (1996) describe two contradictory effects of the Internet on price that are related to price transparency. First, a supplier can use the technology for differential pricing, for example, for customers in different countries. However, if precautions are not taken about price, the customers may be able to quickly find out about the price discrimination and they will object to it.

Pricing online has to take into account the concept of price elasticity of demand. This is a measure of consumer behaviour based on economic theory that indicates the change in demand for a product or service in response to changes in price. Price elasticity of demand is determined by the price of the product, availability of alternative goods from alternative suppliers and consumer income. A product is said to be 'elastic' (or responsive to price changes) if a small change in price increases or reduces the demand substantially. A product is 'inelastic' if a large change in price is accompanied by a small amount of change in demand.

Satisficing behaviour

Consumers do not behave entirely rationally in product or supplier selection. They will compare alternatives, but then may make their choice given imperfect information.

Commoditisation

The process whereby product selection becomes more dependent on price than on differentiating features, benefits and value-added services.

Although, intuitively, we would think that price transparency enabled through the Internet price comparison services such as Pricerunner (Figure 5.9) would lead to common comparisons of price and the selection of the cheapest product, the reality seems different. Pricing online is relatively inelastic. There are two main reasons for this, first, pricing is only one variable - consumers also decide on suppliers according to other aspects about the brand such as familiarity, trust and perceived service levels. Secondly, consumers often display satisficing behaviour. The term 'satisfice' was coined by Herbert Simon in 1957 when he said that people are only 'rational enough' and that they suspend or relax their rationality if they feel it is no longer required. This is called 'bounded rationality' by cognitive psychologists. In other words, although consumers may seek to minimise some variable (such as price) when making a product or supplier selection, most may not try too hard. Online, this is supported by research by Johnson et al. (2004) who showed that by analysing panel data from over 10,000 Internet households and three commodity-like products (books, compact discs (CDs) and air travel services) the amount of online search is actually quite limited. On average, households visit only 1.2 book sites, 1.3 CD sites and 1.8 travel sites during a typical active month in each category. Of course, these averages will reflect a range of behaviour. This is consistent with earlier research quoted by Marn (2000) which suggested that only around 8% of active online consumers are 'aggressive price shoppers'. Furthermore, he notes that Internet price bands have remained broad. Online booksellers' prices varied by an average of 33% and those of CD sellers by 25%.

One strategy for companies in the face of increased price transparency is to highlight the other features of the brand, to reduce the emphasis on cost as a differentiator. In October 2000, Revolution magazine reported a dispute between Abbey National and financial comparison site Moneysupermarket.com (www.moneysupermarket.com). The bank had reportedly requested that several comparison sites including Moneysupermarket not list them and a legal dispute ensued.

For business commodities, auctions on business-to-business exchanges can also have a similar effect of driving down price. Purchase of some products that have not traditionally been thought of as commodities may become more price-sensitive. This process is known as commoditisation. Examples of goods that are becoming commoditised include electrical goods and cars.

Activity 5.3

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