EFFECTS OF COMPARISON SHOPPING WEBSITES ON MARKET PERFORMANCE: DOES MARKET STRUCTURE MATTER?

The presence of Comparison Shopping (CS) websites not only allows consumers to gain quick access to multiple merchants. product offers, but also permits consumers to perform extensive comparison of products and prices prior to purchase. Given the significant reduction in search cost, it has been touted that CS websites can put merchants under increased price competition, resulting in commoditized markets, limited value of branding, and ultimately, convergence of prices to the competitive equilibrium. However, some studies suggest that lower search cost could make any price movement apparent to all participating merchants and hence promote price collusion. This research seeks to explicate the conditions under which CS websites are more likely or less likely to intensify market competition. Following the principles of experimental economics, we modeled and examined the impact of CS websites in many simulated markets featuring merchant characteristics (such as absence and presence of market power) and product type (such as commodity products and differentiated products). Through two series of experiments, we find that the lowering of search cost by CS websites could have opposite effects on market performance, depending on the underlying market structure.