Price comparison for music CDs in electronic and brick-and-mortar markets: implications for emergent electronic commerce

The Internet has great potential as a medium to reach consumers. We need to examine the efficiency of this medium in producing efficient allocations in market transactions and increasing buyer welfare. Using the case of Internet-based shops selling music CDs, we compared prices on the Internet and in brick-and-mortar shops, and investigated how the general market efficiency hypothesis is borne out in practice. We collected price information for 21 current-hits and 23 old-hits albums. Also, prices for the same albums were collected from top five nationally-known brick-and-mortar CD shops. Overall, 428 data points, 296 from the Internet and 132 from brick-and-mortar retail shops were collected. The results showed that a) the Internet market still shows price differences despite the apparently near zero searching cost, b) CD prices for the current-hit albums were lower in the brick-and-mortar market, but the old hits prices were nearly similar or slightly lower in the Internet shops, and c) the two largest Internet sellers seem to have a matching pricing strategy. Through this effort we derive a better understanding as to the shape of the fully-edged electronic commerce system that is taking shape now. We argue that a fundamental difference in the structure of the Internet market leads sellers to employ new strategies to extract the consumer surplus. We, especially, propose that differences in consumer base, sellers' inventory cost and buyers' purchasing cost can explain the higher-than-expected Internet prices and price dispersion for the two different types of products.