This paper examines drip pricing related to compulsory charges—a situation where firms intentionally make it costly for consumers to discover mandatory fees or surcharges that “drip” into the full (total) price, which is only revealed after incurring the hassle cost of completing a purchase. We show that drip pricing can arise as an equilibrium phenomenon with fully rational consumers and profit-maximizing firms. We also show that when consumers and firms are rational (a) situations where drip pricing raises prices and harms consumers are unlikely to arise from unilateral business decisions and (b) the most likely avenue by which drip pricing harms consumers is through the coordinated adoption of drip pricing.

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This paper examines the economics of digital platforms and two-sided markets and discusses the economic conditions that underlie policy assertions by advocates of both interventionist and laissez-faire policies. We include applications to internet search, online advertising, media, data, and privacy. Our goal is to provide a balanced look at the economic assumptions that underlie the many “possibility theorems” policymakers use to rationalize different policies (e.g., regulation, breaking up large companies, subsidizing entry, forced data sharing, or maintaining the status quo). Our discussion of the economics underlying various possibility theorems highlights the type of information and analyses required to determine whether alternative forms of intervention are likely to enhance the welfare of various market participants. While it is relatively easy to identify theoretical conditions under which intervention dominates the status quo (and vice versa), empirical verification is difficult because multi-sided platforms have many interrelated parts and involve complex data. These complexities augment the challenges inherent in implementing welfare-enhancing policies and highlight the importance of evidence-based decision-making.

Author(s): Barnett, Jonathan; Baye, Michael R; Cooper, James C; Crane, Daniel A; Elzinga, Kenneth G; Epstein, Richard; Garza, Deborah; Hazlett, Thomas W; Hurwitz, Justin Gus; Klein, Benjamin; Klick, Jonathan; Lambert, Thomas A; Lipsky, Tad; Manne, Geoffrey A; Masten, Scott E; Ohlhausen, Maureen; Rill, James; Rybnicek, Jan; Smith, Vernon L; Teece, David; Willig, Robert; Wright, Joshua D; Yun, John M

We examine the effects of privacy policies regarding transactions (e.g., price/quantity) data on online shopping platforms. Disclosure of transactions data induces consumer signaling behavior that affects merchant pricing decisions and the welfare of platform participants. A profit-maximizing platform prefers the disclosure policy that maximizes total welfare. Although this policy benefits sophisticated consumers, it harms unsophisticated (myopic) consumers. Consequently, the welfare effects of alternative privacy policies, data breaches, deceptive privacy policies, and opt-in/opt-out requirements can differ sharply, depending on the level of consumer sophistication and on other factors such as the prevailing status quo.

The U.S. antitrust laws are about protecting consumers from harm stemming from abuses of competition and the competitive process. Courts, private parties, and federal agencies extensively rely upon economists to help evaluate the merits of, and potential harm from, alleged violations of the Clayton Act, the Sherman Act and, more generally, business practices that are alleged to run afoul of antitrust law. These analyses often involve statistical and econometric techniques that facilitate decision-making based on scientific evidence of likely harm to competition or consumers. But in contrast, the typical approach to a consumer protection matter relies upon a combination of surveys and subjective opinions to establish the facts relevant to a consumer protection dispute. We show how economics can be used in consumer protection matters to help prove or disprove a claim that a business practice adversely impacted consumers, and to shed light on the economic merits of litigating versus settling cases. In our experience, many seemingly benign consumer protection settlements induce asymmetries in the marketplace that put the settling firm at a competitive disadvantage. Regardless of whether one’s goal is to protect consumers or defend one’s client, doing so requires accounting for these effects. More broadly, economics provides tools which, when properly utilized, can help improve the allocation of scarce resources — at agencies and beyond — to better serve and protect consumers and competition.

Organic product search results on Google and Bing do not systematically include information about seller characteristics (e.g., feedback ratings and prices). Consequently, it is often assumed that a retailer's organic traffic is driven by the prominence of its position in the list of search results. We propose a novel measure of the prominence of a retailer's name, and show that it is also an important predictor of the organic traffic retailers enjoy from product searches through Google and Bing. We also show that failure to account for the prominence of retailers' names -- as well as the endogeneity of retailers' positions in the list of search results -- significantly inflates the estimated impact of screen position on organic clicks.

The lion's share of retail traffic through search engines originates from organic (natural) rather than sponsored (paid) links. We use a dataset constructed from over 12,000 search terms and 2million users to identify drivers of the organic clicks that the top 759 retailers received from search engines in August 2012. Our results are potentially important for search engine optimization (SEO). We find that a retailer's investments in factors such as the quality and brand awareness of its site increases organic clicks through both a direct and an indirect effect. The direct effect stems purely from consumer behavior: The higher the quality of an online retailer, the greater the number of consumers who click its link rather than a competitor in the list of organic results. The indirect effect stems from our finding that search engines tend to place higher quality sites in better positions, which results in additional clicks because consumers tend to click links in more favorable positions. We also find that consumers who are older, wealthier, conduct searches from work, use fewer words, or include a brand name product in their search are more likely to click a retailer's organic link following a product search. Finally, the quality of a retailer's site appears to be especially important in attracting organic traffic from individuals with higher incomes. The beneficial direct and indirect effects of an online retailer's brand equity on organic clicks, coupled with the spillover effects on traffic through other online and traditional channels, leads us to conclude that investments in the quality and brand awareness of a site should be included as part of an SEO strategy.

This comprehensive collection, edited by two pioneers of e-commerce, presents thirty of the most important papers written in the fields of economics, marketing and strategy. Topics covered include evaluation of the benefit to consumers of competition and product variety online, examination of auctions and reputational feedback mechanisms designed to mitigate informational asymmetries in online markets, and the debate on digital property rights including privacy, piracy and the open source movement. Together with an original introduction by the editors, this title provides a readily accessible wealth of material on the subject of e-commerce, invaluable to scholars and practitioners alike.

This paper considers identification and estimation of a general model for online price competition. We show that when the number of competing firms is unknown, the underlying parameters of the model can still be identified and estimated employing recently developed results on measurement errors. We illustrate our methodology using UK data for personal digital assistants and employ the estimates to simulate competitive effects. Our results reveal that heightened competition has differential effects on the prices paid by different consumer segments.

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This paper provides a data-driven overview of the different online platforms that consumers use to search for books and booksellers, and documents how the use of these platforms is shifting over time. Our data suggest that, as a result of digitization, consumers are increasingly conducting searches for books at retailer sites and closed systems (e.g., the Kindle and Nook) rather than at general search engines (e.g., Google or Bing). We also highlight a number of challenges that will make it difficult for researchers to accurately measure internet-based search behavior in the years to come. Finally, we highlight a number of open agenda items related to the pricing of books and other digital media, as well as consumer search behavior.

While many conjectured that the information-rich and frictionless nature of online markets would result in marginal cost pricing, this has proved not to be the case. Price dispersion online is ubiquitous. The main reason is that price discovery occurs through platforms that have an incentive to ensure that prices are dispersed so that information is valuable. We survey models of platform pricing and trace the impact of their decisions downstream to e-retailers. Finally, we highlight the connection between empirical findings and theory predictions for e-retail pricing.

This paper examines the evolution of product search. We provide an overview of product search in the pre-internet era, and discuss how online search evolved from directory based search in the early 1990s to “vertical” search engines by the late 1990s. We also document the prominence of price comparison sites in the mid-2000s, and the challenges these platforms faced through 2010. We then use comScore qSearch data to closely examine trends in product search between 2010 and 2012. We find that, today, the vast majority of shoppers conduct product searches at retailer sites and other marketplaces, whereas traditional price comparison sites have become less important.