T here have been many claims that the Internet represents a new nearly "frictionless market." Our research empirically analyzes the characteristics of the Internet as a channel for two categories of homogeneous products-books and CDs. Using a data set of over 8,500 price observations collected over a period of 15 months, we compare pricing behavior at 41 Internet and conventional retail outlets.We find that prices on the Internet are 9 -16% lower than prices in conventional outlets, depending on whether taxes, shipping, and shopping costs are included in the price. Additionally, we find that Internet retailers' price adjustments over time are up to 100 times smaller than conventional retailers' price adjustments-presumably reflecting lower menu costs in Internet channels. We also find that levels of price dispersion depend importantly on the measures employed. When we compare the prices posted by different Internet retailers we find substantial dispersion. Internet retailer prices differ by an average of 33% for books and 25% for CDs. However, when we weight these prices by proxies for market share, we find dispersion is lower in Internet channels than in conventional channels, reflecting the dominance of certain heavily branded retailers.We conclude that while there is lower friction in many dimensions of Internet competition, branding, awareness, and trust remain important sources of heterogeneity among Internet retailers.

We present a framework and empirical estimates that quantify the economic impact of increased product variety made available through electronic markets. While efficiency gains from increased competition significantly enhance consumer surplus, for instance by leading to lower average selling prices, our present research shows that increased product variety made available through electronic markets can be a significantly larger source of consumer surplus gains.One reason for increased product variety on the Internet is the ability of online retailers to provide a large number of products for sale. For example, the number of book titles available at Amazon.com is over 23 times larger than the number of books on the shelves of a typical Barnes & Noble superstore and 57 times greater than the number of books stocked in a typical large independent bookstore. Our analysis indicates that the increased product variety of online bookstores enhanced consumer welfare by $731 million to $1.03 billion in the year 2000, which is at least five times as large as the consumer welfare gain from increased competition and lower prices in this market. There may also be large welfare gains in other SKU-intensive consumer goods such as music, movies, consumer electronics, and computer software and hardware.

Internet shopbots compare prices and service levels at competing retailers, creating a laboratory for analysing consumer choice. We analyse 20,268 shopbot consumers who select various books from 33 retailers over 69 days. Although each retailer o¡ers a homogeneous product, we ¢nd that brand is an important determinant of consumer choice. The three most heavily branded retailers hold a $1.72 price advantage over more generic retailers in head-to-head price comparisons. In particular, we ¢nd that consumers use brand as a proxy for retailer credibility in non-contractible aspects of the product and service bundle, such as shipping reliability.

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Sponsored search accounts for 40% of the total online advertising market. These ads appear as ordered lists along with the regular search results in search engine results pages. The conventional wisdom in the industry is that the top position is the most desirable position for advertisers. This has led to intense competition among advertisers to secure the top positions in the results pages.We evaluate the impact of ad placement on revenues and profits generated from sponsored search using data for several hundred keywords from the ad campaign of an online retailer. Using a hierarchical Bayesian model, we measure the impact of ad placement on both click-through rate and conversion rate for these keywords. We find that while click through rate decreases with position, conversion rate first increases and then decreases with position for longer keywords. The net effect is that, contrary to conventional wisdom, the topmost position in sponsored search advertisements is not necessarily the revenue-or profit-maximizing position. Our results inform the advertising strategies of firms participating in sponsored search auctions and provide insight into consumer behavior in these environments. Specifically, they help correct a significant misunderstanding among advertisers regarding the value of the top position. Further, they reveal potential inefficiencies in present auction mechanisms used by the search engines. the likelihood that a consumer will buy a product) and advertising costs.2 Thus, the net impact of ad position on overall revenues and profits is not well understood.In this paper we address this question by empirically analyzing how ad position in sponsored search impacts an advertiser's revenues and overall profits. We use a unique panel dataset from a Search Engine Marketing (SEM) firm that catalogs daily clicks, conversions, and cost data for multiple keywords sponsored by one of its clients. One of the challenges with sponsored search data is that clicks and conversions are sparse. In order to address this, we use a hierarchical Bayesian model to analyze the click and conversion probabilities in this environment while accounting for heterogeneity across keywords. Our findings suggest that, contrary to conventional wisdom, the topmost positions for keywords in our dataset are associated with lower revenues relative to lower (and less expensive) positions. Our results confirm that ad clickthrough rate decreases with position. However, we find that the conversion rate and revenue initially increase and then decrease with ad position for longer keyphrases. For shorter keyphrases, the revenue decreases with position. However, the costs are much higher in the top positions resulting in higher profits at lower position.Our paper makes two main contributions. First, our paper provides key managerial insights for advertisers. A common assumption in the industry is that the value of a click from a sponsored search campaign is independent of the position of the advertisement. Our results indicate this is not...

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The Internet and related information technologies are transforming the distribution of product sales across products, and the effects are likely to grow in coming years. Both the Long Tail and the Superstar effect are manifestations of these changes, yet researchers lack consistent metrics or models for integrating and extending their insights and predictions. In this paper, we begin with a taxonomy of the technological and non-technological drivers of both the Long Tails and Superstars and then define and contrast the key metrics for analyzing these phenomena. While significant research has already been done, the core the paper describes a large and promising set of questions forming a research agenda. Important opportunities exist for understanding future changes in product distribution; its impact on supply chains (including crosschannel competition, competition within the Internet channel, implications for the growth of firms, and the balance of power within the supply chain); implications for pricing, promotion and product design; and ultimately potential effects on society more generally. Our approach provides an introduction to some of the relevant research findings and allows us to identify opportunities for cross-pollination of methods and insights from related research topics.

P eer-to-peer (P2P) file sharing networks are an important medium for the distribution of information goods.However, there is little empirical research into the optimal design of these networks under real-world conditions. Early speculation about the behavior of P2P networks has focused on the role that positive network externalities play in improving performance as the network grows. However, negative network externalities also arise in P2P networks because of the consumption of scarce network resources or an increased propensity of users to free ride in larger networks, and the impact of these negative network externalities-while potentially important-has received far less attention.Our research addresses this gap in understanding by measuring the impact of both positive and negative network externalities on the optimal size of P2P networks. Our research uses a unique dataset collected from the six most popular OpenNap P2P networks between December 19, 2000, and April 22, 2001. We find that users contribute additional value to the network at a decreasing rate and impose costs on the network at an increasing rate, while the network increases in size. Our results also suggest that users are less likely to contribute resources to the network as the network size increases. Together, these results suggest that the optimal size of these centralized P2P networks is bounded-At some point the costs that a marginal user imposes on the network will exceed the value they provide to the network. This finding is in contrast to early predictions that larger P2P networks would always provide more value to users than smaller networks. Finally, these results also highlight the importance of considering user incentives-an important determinant of resource sharing in P2P networks-in network design.