PRICE RIGIDITY ON THE INTERNET: NEW EVIDENCE FROM THE ONLINE BOOKSELLING INDUSTRY

Price rigidity occurs when prices do not change with the regularity predicted by standard economic theory. This has been a topic of long-standing interest with respect to firms, industries, and the economy as a whole. Compared to traditional markets where significant costs associated with price adjustments occur, Internet-based retailers are able to more accurately control inventory and costs, sample demand at any given moment, and have significant price-changing capabilities. Despite the growing number of theoretical and empirical studies on price dispersion (e.g., Clemons et al. 2002), price levels (e.g., Brynjolfsson and Smith 2000), and price-setting behavior (e.g., Kauffman and Wood 2004) to explain firm pricing strategies on the Internet, there are only a few studies on price-changing behaviors and price rigidities in e-commerce. Many observers have commented that price adjustment costs are almost entirely absent in e-commerce because they primarily consist of the costs of simple database updates, which may be easily programmed (Brynjolfsson and Smith 2000). This suggests that Internet-based retailers have the capability to make more frequent price changes than do traditional retailers, which actually may not be true. With the concern about the pervasive expectation of declining price rigidity on the Internet, we address the following research questions: • Other than the menu cost explanation, what other factors determine Internet-based retailers’ price-changing behaviors? • From the product level, how differently do price elements (e.g., nine-ending price, relative price, and price discount) and non-price elements (e.g.,