Understanding Digital Markets: Review and Assesment

TLDR

The rapid growth of the Internet as a commerce channel raises the need to understand electronic market characteristics, prompting diverse questions from businesses, consumers, regulators, and researchers. The study seeks to determine whether electronic markets reduce friction, identify factors causing price dispersion, and highlight key e‑commerce developments to monitor. The authors review existing academic research, discuss its implications, and propose future research directions. The review finds that Internet markets are more efficient in price levels, menu costs, and elasticity, yet exhibit persistent price dispersion partly due to retailer heterogeneity, and anticipates significant changes as cross‑channel strategies, infomediaries, shopbots, supply‑chain improvements, and new information markets mature.

Abstract

As the Internet develops into a robust channel for commerce, it will be important to understand the characteristics of electronic markets. Businesses, consumers, government regulators, and academic researchers face a variety of questions when analyzing these nascent markets. Will electronic markets have less friction than comparable conventional markets? What factors lead to dispersion in Internet prices? What are the major electronic commerce developments to watch in the coming years? This paper addresses these questions by reviewing current academic research, discussing the implications of this research, and proposing areas for future study. We review evidence that Internet markets are more efficient than conventional markets with respect to price levels, menu costs, and price elasticity. However, several studies find substantial and persistent dispersion in prices on the Internet. This price dispersion may be explained, in part, by heterogeneity in retailer-specific factors such as trust and awareness. In addition, we note that Internet markets are still in an early stage of development and may change dramatically in the coming years with the development of cross-channel sales strategies, infomediaries and shopbots, improved supply chain management, and new information markets.