Who wants to encourage people to shop around? Don’t we want buyers to come back to our store and only our store every time? The internet will bring new levels of transparency and power to the buyer, right?
Not necessarily, argues this Slate article, which cites research by economist Hal Varian to support the notion that etailers vary prices frequently, shifting the price leader in a given category over time. This means that price-driven shoppers will likely visit multiple stores in the course of shopping for a new TV or DVD player, giving each site a chance to snag visitors with other offers. While doing this online is easier than doing it on the floor, bricks and mortar companies have done this for a long time. If buyers find a pair of jeans on sale at one store, they don’t know whether they might be even cheaper at another store, so true bargain hunters will visit both stores. Only one store will win the wallet share for comparison item, but each store may end up selling something to the buyer.
(The article also notes that if you have a highly desirable, differentiated product, you can enforce Minimum Advertised Price, or MAP, policies, that keep prices high and protect brand image. The article highlights the iPod, but Apple has done a good job protecting prices across its line. Nike also enforces tough MAP policies on its high-end shoe lines. Many resellers evade MAP policies by marking prices as “too low to show”, so the policy only works when the maker has considerable market power. For resellers offering such high-demand items, the simple presence of the item is a draw, especially when consumers know that they cannot comparison shop on such goods.
The “official” purpose of MAP policies is to protect smaller resellers from larger competitors, but they also benefit those who can enforce them by focusing attention on the product itself, not its price.)