A study of the effects of low search cost online: How product selection, technology usage, and spatiality drive consumer demand

Mohammad Saifur Rahman, Purdue University


A key question for Internet commerce is the strategic implications of technological advancements that distinguish the Internet channel from the traditional channels. One important distinction is that website technologies lead to a lower search cost on the Internet. Consequently, Internet retailers offer a sea of alternatives and consumers use advanced technologies such as the search function and the recommendation system to lower search costs. In this dissertation, we seek to understand how Internet markets differ from traditional markets and how businesses should adapt their strategies to the unique characteristics of Internet markets. The primary data source for the dissertation is a direct retailer. We have collected several other unique datasets and combined them for our research. The dissertation consists of two essays. The first essay addresses the nature of competition between Internet retailers and traditional brick-and-mortar retailers. Although traditional retailers vastly outsell Internet retailers in most product categories, research on Internet retailing has largely neglected this fundamental dimension of competition. Is cross-channel competition significant, and, if so, how and where can Internet retailers win this battle? Interestingly, our analyses show that Internet retailers face significant competition from brick-and-mortar retailers when selling mainstream products, but are virtually immune from competition when selling niche products. Furthermore, since the Internet channel sells significantly more niche products than the catalog channel – a phenomenon sometimes called the “Long Tail” – the competition between the Internet channel and local stores is less intense than the competition between the catalog channel and local stores. The second essay focuses on the impact of the technologies that distinguish Internet markets from traditional markets. Despite the widespread adoption of search and recommendation technologies on the Internet, empirical research that examines the economic impact of these technologies is scarce. Does consumers’ usage of these technologies have an impact on consumer demand? How does this impact vary across different consumers and different products? Our research attempts to answer these questions and fill the void in the literature. We provide a theoretical framework that illustrates how IT improves the efficiency with which consumers gather information and utilize the acquired information in an online shopping environment. Our analyses show that consumers’ IT usage has a significant impact on consumer demand, but this impact varies for different technologies and across different products. In particular, the usage of directed search leads to a higher demand for promoted products, while lowering the demand for non-promoted products. In contrast, the usage of recommendation systems increases the demand for both promoted and non-promoted products. Surprisingly, the usage of non-directed search does not have a significant effect on consumer demand. Our results imply that only the recommendation system is effective for information acquisition, which greatly influences the demand for non-promoted products.




Hu, Purdue University.

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