Marketing Weblog: How does Internet push down prices? - Instituto de Empresa Business School

What role does Internet have in pricing? Till what extent it can help to boost competition and plummet prices? What kind of services and products are going to be mainly affected?

You want to get a new tv. You don´t have any idea about tvs. You only have an approximate idea of budget and functionality but nothing else. What would be the purchasing process?
15 years ago you would have gone straight to the store, speak to the specialist (the salesperson) and, if he is smart enough, get what he is recommending to you.
Nowadays, the situation is likely to be quite different. Before going to the store you are surely going to do a Google, check some product reviews and price comparisons, wander thru some blogs to see what people think, and finally gain some criteria about the tv. After that you might decide to get it online, or go to specific recommended stores. In this case, the salesperson is to have a say, but your decision will be more founded and based in your own criteria.

Something is going wrong with your pet. He is behaving in a strange way and sleeps more than usual.
15 years ago you would go straight to the vet and do exactly what the veterinarian tells you to do (an analysis, pills, special treatment or whatever he recommends). It seems to be reasonable for he is the expert and you do not have any idea.
Nowadays, the process is very likely to be pretty similar. You might check the web and get some info, but you will never be able to make up your mind about what to do. There are many possible explanations for the symptoms experienced by your pet and you do not want to take any risk at all!

As a consequence, you are able to change your mind in the first case but not in the second one. The main explanation for this is that Internet has helped to eliminate (or reduce significantly) the Assymetric Information that you and the salesperson have in the case of the tv, but not in the case of the service.

Assymetric Information is to be defined as the difference in information that the purchaser and seller have. The more Assymetryc Information you experience, the more selling power the seller have. And the more selling power he has, the more likely you are of not getting a good deal, not getting the right stuff, and paying a non-fair price for the transaction.

Internet helps you in other words to make a criteria about something, by providing transparency of variety, prices, functionality and supply. Which eventually results in a sharp drop in prices.

Does it have the same effect on every single service or item? Not necessarily. Assuming a minimum price (you are not to compare for instance the price of tea in two stores), the more homogeneous the products are, the higher the effect will be. This is also true for products and services where the added value granted by the distribution is limited.

The latter also applies to the product and services that are mainly sold through Internet currently and in the future. Thus products like books and trips are and will be more and more sold through Internet; while heterogeneous services or products that require and big amount of support, are likely to be sold through traditional channels.

To sum up, Internet is to plummet prices in products easy to compare + where little added value given by distribution is given. Maybe it is good time to think where your products + distribution are.

PS: For more detailed examples about Assymetric Information check a book called Freakonomics by S.D.Levitt + S.J Dubner.

Comments

Internet is creating a new trend of syndicated information where consumers and buyers became the main source. This trend requires from manufacturers and retailers a biggest commitment to ensure client's satisfaction in order to transform them in advocates.

More than ever the consumer is the boss. Nowadays an unsatisfied client means not just a mad client but a very bad business with an important impact in future sales.

Excellent explanation. Clear or easy to understand. Thank you.

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