February 08, 2005
Shopbots and Nash Equilibrium
Interesting News.com article by Paul Festa discussing a report by Prof. Michael Baye of Indiana University on why shopbots have not led to homogeneous prices by all retailers. The basic argument: retailer are constantly changing prices to avoid letting competitors compete against a static target.
While the claim that we have reached a Nash Equilibrium makes the argument sexy, there is something missing in this argument (at least as summarized by Festa). If retailers are constantly changing their prices, consumers should be flocking to shopbots because they can provide time-sensitive and hard-to-aggregate information (i.e., which retailer is dropping its shorts on pricing today). This should give the shopbots significant power over retailers and lead to consumers constantly rewarding the low-price leader at the exclusion of the other retailers.
In fact, it seems like the opposite is occurring—many consumers use shopbots rarely or never. Is it because the price savings consumers may experience do not warrant changing their shopping patterns to check with the shopbots? Because consumers compare more factors than price? Any smart online shopper knows that you have to evaluate merchant reliability as part of the purchasing decision. So perhaps the price dispersion cited in the article reflects inefficiencies in the information flows or price premiums for merchant quality. Or perhaps the low-price leaders are pricing below-cost as one last marketing hurrah before they flame out in a blaze of glory.
Posted by Eric at February 8, 2005 02:31 AM | Search Engines