Beyond the Hype of Frictionless Markets: Evidence of Heterogeneity

We explore daily patterns of Internet pricing for the two major retailers, Amazon.com and Barnes and Noble.com (BN), using data on 377 books collected over a 449-day period in 2003-2004. We frame this investigation in terms of a key question: How rigid are prices on the Internet? Are there reasons to suggest that prior predictions of more flexible prices on the Internet may not have been founded on the appropriate theoretical knowledge? We find that Internet retailers, in contrast with traditional firms, adjust prices any day of the week throughout the year. Yet, firms ’ price adjustments for books occur much less frequently than daily—every 90 days on average. For most observers of Internet-based selling, this is surprising, since most expect more frequent price adjustments—based on the quality of technological environment that supports price-setting. In fact, our results show that price change activity appears to vary by book category, from a high of one change on average every 61 days for bestsellers to a low of one change every 184 days on average for steadysellers. In addition, we learned that individual firms exhibited different patterns for their price changes: Amazon changed book prices ever