New Study Indicates Online Pricing Significantly Affects Sales

An economics study regarding online price elasticity released last spring seems to bear out what many Internet experts have thought all along regarding book pricing: the higher the price, the fewer the sales.

In the April 2003 study, "Measuring Prices and Price Competition Online: Amazon and Barnes & Noble," Judith Chevalier of the Yale School of Management and Austan Goolsbee of the University of Chicago Graduate School of Business, studied Amazon and Barnesandnoble.com (BN.com) at three points in 2001 in an effort to discover, among other things, how pricing impacted sales. In the study, Chevalier and Goolsbee state: "[W]e show that there is significant price sensitivity for online book purchases at both sites."

For the study, data was collected during three different weeks in 2001 on about 18,000 different books from the Web sites of Amazon.com and BN.com. The three samples were taken during the weeks of April, June, and August, and showed major price changes by both sellers during this time. In the first period, the general price structure for both online booksellers was to discount hardback books at 20 percent off the retail price and paperback books at 10 percent off.

In June, Amazon raised the prices of many of its books, but launched an offer of free shipping for customers who bought two books or more. Amazon also eliminated all discounts for most paperback books, the study reported. At this time, BN.com maintained their previous pricing structure, but then, in July, launched free shipping with the purchase of two items. At the same time, Amazon discontinued the free shipping offer and changed prices again. In the August sample, Amazon reinstated the 20 percent discount but only to books over $20. Meanwhile, BN.com's policy "was not explicitly stated," the authors of the study wrote, "but they appeared to move away from the standard discounts of 10 and 20 percent for paper and hardback books."

Though price structures proved important, Chevalier and Goolsbee noted that demand at Barnesandnoble.com is far more price sensitive than at Amazon. For instance, when Barnesandnoble.com raises its price by one percent, sales decrease by four percent; at Amazon, the same increase only results in a half percent sales decrease.

Overall, the study's results were somewhat surprising to the authors, who were among those economists who predicted the Internet would unleash "incredibly vigorous competition to a point that the law of one price is going to hold," Chevalier told the New York Times. But while the Internet has created tremendous price competition, there aren't uniformly low prices. Pooling the three studied periods together, about 36 percent of the books have identical prices across the two sites, with Amazon's prices higher for about 28 percent of the books and lower for about 35 percent.

Nonetheless, a price increase results in lost customers, even if just slightly. In the pooled sample, when the relative price is lower at Amazon, "the sales ranks also tend to be lower (meaning greater sales)," the study noted.

Moreover, a price increase drives the online shopper to a competitor to find the best bargain. For instance, the study noted that a one percent price increase at Amazon reduced quantity sold by about .5 percent at Amazon and raised quantity at Barnesandnoble.com by 3.5 percent. Conversely, when Barnesandnoble.com raised prices by one percent, it reduced its sales by 4 percent, but increased sales at Amazon by only around .2 percent. This seemed to indicate, the study noted, that many of the lost customers from Barnesandnoble.com evidently do not just go buy the book from Amazon.

"Except for Amazon, the online bookselling business is extremely competitive," Goolsbee told the New York Times. "If they mess up the pricing, they're just going to die." --David Grogan