Evolution of prices in electronic markets with heterogeneous vs. homogenous preferences for e-tailers

Price comparison engines enable customers to compare product offerings of online sellers with almost complete information on the alternatives, and hence create erosion in store loyalty. Consequently, the competitive dynamics are affected in markets where price comparison shopping is diffusing rapidly. We use a diffusion of price comparison model to examine the effects of the relative proportions of switcher and loyal segments on firms´ pricing decisions. This analysis shows that the increasing numbers of price comparison-shoppers pull prices down, and the rate at which prices decrease is shaped by the diffusion curve and the brand preference. Our analysis shows that stores with loyal customers or with a preference for their brands can attain higher profits further into the diffusion process. The direct implication is for firms to utilize their IT, operations and marketing capabilities to create, enhance and cultivate stronger preferences for and loyalty to their brand names in order to survive the inevitable information rich markets of tomorrow.