Implications of Reduced Search Cost and Free Riding in E-Commerce

Abstract

This paper examines a market where the provision of information service is costly, but information service has the characteristics of a public good. Consumers, on the other hand, can use the information service to make an informed purchase decision and derive higher utility from consuming their ideal product. However, after receiving the information service from an information service provider, consumers can easily free ride by purchasing at low-price sellers who do not provide any information service. The paper examines the competition where sellers compete by providing information service for horizontally differentiated products and where technology reduces consumers' search cost. It is found that in this market a seller needs to establish itself as an information service provider in order to make positive profits, even when there is free riding. A seller, however, cannot make positive profits by free riding all the time. Also, with an increase in competition in the information service market, sellers have reduced incentives to provide information service. It is also found that in this market a decrease in search cost may increase or decrease social welfare.free riding, search cost, electronic markets, electronic commerce

How Does Free Riding on Customer Service Affect Competition?

“…Several studies in channel conflict literature also suggest that free riding decreases the levels of retail service, such as presale service, customer education about product attributes, and salesperson training, in a multichannel distribution setting (see Antia et al 2004 for a survey about free riding in multichannel conflicts). 3 The work of Wu et al (2004) is a notable exception, which shows analytically that retailers might benefit from providing service even in the presence of the painful free-riding problem. Two segments of customers exist: one with a positive search cost and another with zero search cost.…”

The Impact of Search and Recommendation Systems on Sales in Electronic Commerce

“…213-225) on the optimal search for information show that consumers search for a longer period if search costs are low and therefore they potentially find other products which better match their preferences. Thus, decreasing search costs can affect the welfare significantly (Wu et al 2004). Heterogeneous search costs are also one way to pursue price discrimination (Varian 1980;Hinz et al 2010) as consumers with a higher willingness to pay usually have higher search costs (Tellis 1986, pp.…”

Editorial: Errors in the Variables, Unobserved Heterogeneity, and Other Ways of Hiding Statistical Error

“…We might reject the theory if we observe full customization. Another theory (Wu et al 2004) predicts that, when provision of consumer information service is costly and consumers can easily free ride on that information, we should not observe sellers who free ride all the time. We might reject the theory if we observe full free riding.…”