Online Trade: Increase in the Number of Sellers Leads to Decrease in Prices

Internet shopping is becoming more and more popular. On price comparison sites users can obtain helpful advice, where to find the best price. A recent study conducted by the Centre for European Economic Research (ZEW) in Mannheim and the University of Linz shows that price comparisons are worth the effort. The study is part of the ZEW research programme "Strengthening Efficiency and Competitiveness in the European Knowledge Economies"(SEEK).

The results show that already ten additional competitors in the market offering the same product reduce the mark-up of the cheapest provider by 1.7 percentage points. The mark-up of the slightly more expensive median providers is still reduced by 0.85 percentage points when ten additional retailers enter the market. For their analysis, researchers from the University of Linz and ZEW used data from the largest Austrian price comparison site "www.geizhals.at", which is now also available in Germany on "www.geizhals.de". The researchers observed the prices of 70 different digital camera models on a daily basis and calculated the mark-ups of approx. 200 Austrian and German sellers as well as the number of clicks on the different products during a period of up to 15 months. Furthermore, they used information on the wholesale price of each product to calculate the online-retailers’ mark-ups.

Apart from an increase in the number of sellers, prices in online-shopping markets are also influenced by a product’s life cycle. Due to the introduction of new products, which is making existing products technically obsolete, the price of a product falls over its life cycle. This effect is considerably strong for technical devices. The study shows that the life cycle of the cameras included in the analysis is relatively short. The starting point of a life cycle was defined as the day the product was offered online for the first time. The end of a life cycle was reached when the amount of clicks on a product diminished to less than 500 in a defined time span. The researchers found that the decrease in mark-ups due to the entry of additional sellers is especially strong during the first month of the product life cycle, during months two to four the price decrease is reduced and starts to grow again from the sixth months on. "For online customers this means that by waiting for three more weeks they can benefit from  the same price reduction as when a new competitor offering the same product enters the market", explains ZEW researcher Michael Kummer.

For further information please contact

Michael Kummer, Phone +49 621/1235-357, E-mail kummer@zew.de