Price comparison for music CDs in electronic and brick-and-mortar markets: implications for emergent electronic commerce

The Internet has great potential as a medium to reach consumers. We need to examine the efficiency of this medium in producing efficient allocations in market transactions and increasing buyer welfare. Using the case of Internet-based shops selling music CDs, we compared prices on the Internet and in brick-and-mortar shops, and investigated how the general market efficiency hypothesis is borne out in practice. We collected price information for 21 current-hits and 23 old-hits albums. Also, prices for the same albums were collected from top five nationally-known brick-and-mortar CD shops. Overall, 428 data points, 296 from the Internet and 132 from brick-and-mortar retail shops were collected. The results showed that a) the Internet market still shows price differences despite the apparently near zero searching cost, b) CD prices for the current-hit albums were lower in the brick-and-mortar market, but the old hits prices were nearly similar or slightly lower in the Internet shops, and c) the two largest Internet sellers seem to have a matching pricing strategy. Through this effort we derive a better understanding as to the shape of the fully-edged electronic commerce system that is taking shape now. We argue that a fundamental difference in the structure of the Internet market leads sellers to employ new strategies to extract the consumer surplus. We, especially, propose that differences in consumer base, sellers´ inventory cost and buyers´ purchasing cost can explain the higher-than-expected Internet prices and price dispersion for the two different types of products.