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Price isn't everything in the transparent world of online commerce

In the Web's early days, self-styled seers proclaimed that the ironclad law of online commerce would be survival of the cheapest. Consumers could compare products with a few clicks of a mouse, these folks said, and thus they'd all soon migrate to the places where they paid the least. It hasn't worked out that way. Plenty of sites have made good businesses out of offering great deals, but lots of higher-priced sellers remain. What has happened, says Rob Kauffman, a professor of information systems at the W. P. Carey School of Business, is that pricing transparency has become just one part, though a critical one, of companies' online strategies.

2010-04-07

In the Web's early days, self-styled seers proclaimed that the ironclad law of online commerce would be survival of the cheapest. Consumers could compare products with a few clicks of a mouse, these folks said, and thus they'd all soon migrate to the places where they paid the least. It hasn't worked out that way. Plenty of sites have made good businesses out of offering great deals. Witness eBay, half.com and even craigslist, though its idealistic founder, Craig Newmark, might quarrel with having his "electronic town square" lumped with mere retailers. But lots of higher-priced sellers remain. L.L. Bean, for example, has a robust web business, even though it's certainly not the cheapest provider of outdoor clothing and gear. And Amazon, for its part, seems to aspire to offer a little of everything rather than the cheapest of anything. What has happened, says Rob Kauffman, a professor of information systems at the W. P. Carey School of Business, is that pricing transparency has become just one part, though a critical one, of companies' online strategies. Firms have realized that their online relationship with consumers is deeper than just a number, Kauffman says. As in bricks-and-mortar stores, customers care about the quality and attributes of goods and want to interact online with their retailers and each other. On top of this, firms have come to understand that online systems give them, in effect, a legal way to collude with each other by signaling their pricing intentions. Or as Kauffman and two co-authors put it in a recent paper: "More information about competitive offerings does not necessarily lead to lower prices and lower profits, contrary to the commonly held expectation that emerged upon the advent of the Internet … Price transparency is likely to have a negative impact on market prices, but this impact may be offset by the ability of suppliers to tacitly collude." Kauffman has spent a career studying these sorts of information strategy problems and, in his recent paper, has outlined what scholars now know about Internet pricing and what they still need to explore. The paper, written with Nelson Granados at Pepperdine University and Alok Gupta at the University of Minnesota, is titled, "Information Transparency in Business-to-Consumer Markets: Concepts, Framework and Research Agenda." It will be published in the journal Information Systems Research. Unfriendly skies One of Kauffman's areas of expertise is the online travel business. Here, more clearly than in many sectors, you can see how firms have become sophisticated in their use of online pricing techniques. An obvious example is the airlines. They've experienced the very sort of brutal price competition that was predicted in the early days of the Web. "It's easy to describe an airline ticket, and thus we've seen extreme commoditization with those," Kauffman says. "Pennies can put you at the top of a search engine's price list." Airline fares have become so transparent that a site called Kayak.com has emerged that enables consumers to search the search engines. Kayak combs through all of the major travel sites and offers a variety of user-friendly tools with which people can refine and pinpoint searches for the best fares. "The basic idea is that they're providing intelligence to the marketplace like Bloomberg and Reuters do in the financial markets," Kauffman says. "You identify when you want to fly and where and compare all the prices that are visible." Yet even on Kayak, a stated low price isn't quite as simple as it seems to first glance. Thanks to sophisticated algorithms and the ease of changing information on the web, airlines tweak their fares constantly. "Most major airlines employ complex pricing schemes accompanied by dynamic pricing adjustments to obfuscate their pricing strategies," the three scholars write. Their systems also enable them to try to influence buying behavior by, for example, showing seat inventory. Thus when searching for a fare, a consumer will often see that there are only a small number of seats available at a given price. "They have no incentive to say there are 80 seats at that price," Kauffman explains. "You'll see two, three or four. That encourages the consumer to think that something could change in the near future. They're using psychological tools to get consumers to respond in ways that they have already charted out." Lately, as anyone who flies regularly knows, airlines have also counteracted falling fares by instituting fees for everything from a second checked bag to a pillow and blanket. These fees enable them to collect more revenue, while still advertising low fares. Prices also can serve as signals among air carriers -- as suggestions that they all might want to raise their rates. In theory, an airline can post a higher fare on the Internet, hoping that its competitors will match it. If competitors don't respond as hoped, the airline isn't locked into retaining that fare. It hasn't committed to a print ad campaign or made promises to travel agencies, so it can quickly change it. This doesn't sound all that radical until you realize that, in pre-Internet days, airlines could land in legal trouble by trying to coordinate their fares. In a famous incident in the 1980s, Bob Crandall, then-CEO of American Airlines, was accused by the U.S. Justice Department of attempted price-fixing for calling the boss of Braniff International and suggesting that they both raise their fares at Dallas/Fort Worth International Airport. A judge ruled that Crandall hadn't broken any laws because he'd only suggested raising fares but hadn't done it. A similar attempt today would require no telephone call, only a few keystrokes by an anonymous programmer. Getting to know you Retailers like L.L. Bean and Best Buy have responded differently than airlines to online pricing transparency. Instead of developing complicated pricing formulas and changing prices frequently, they've typically chosen to use the web as a way to deepen customers' shopping experiences. By providing lots of detail on features and uses of products, for example, they stymie consumers' efforts to make head-to-head comparisons. Thus a $49 pair of work pants offered by Bean begins to look different from a $48 pair of Carhartt jeans sold by Cabela's. "Initially, for many companies, the web was simply a digital catalogue," Kauffman points out. "Then they realized that there were different ways to represent what they were selling. They also saw that, through all of those transactions, they were learning about their customers' tastes. So now they had the ability to up-sell and cross-sell and started doing pairing and recommending. And thanks to the Web, they were able to measure the incremental value of cross-selling." Lately, websites have sprung up that are combining shopping with social networking. Take Polyvore, which enables shoppers to create outfits and looks by picking clothing and accessories from a variety of retailers. Once a user has created a look, she can share it with other people, both through Polyvore and through networking sites like Facebook. "The idea is to turn your marketplace into an interaction space for your customers, so that what you are offering to them matches what they want," Kauffman explains. Interestingly enough, travel companies, too, have tried to stress features and thus thwart comparison. They do this by offering fare bundles through which a consumer might receive not only a plane ticket but also, perhaps, a hotel room, a rental car and even meals. Had you visited, say, Southwest Airlines' website in late March, you could've received two Las Vegas show tickets as part of a bundle offered by Southwest and MGM hotels. Air Canada has even attempted to apply this sort of thinking to its tickets via its Tango and Tango Plus fares. The airline charges different levels of add-on fees depending on which sort of fare a consumer selects. "It's impossible to represent those in a way that makes the stated ticket price the dominant issue," Kauffman notes. "There are just too many variables."

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