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Published: August 25, 2004

 
 

Recent Studies

The researchers present this conclusion through an overview of the five key theories used to explain price rigidity (also known as price stickiness, inertia, and inflexibility). These authors define rigidity as “when prices do not adequately change in response to underlying cost and demand shocks.”

Price rigidity may occur because the cost of price adjustment is too high. Changing prices is often just as time-consuming and expensive in e-commerce as it is in the bricks-and-mortar environment. New sales materials — printed and online — must be created, and there is the same complexity in communicating pricing changes internally, and to partners, suppliers, and customers.

The second force behind price rigidity is market structure. The more monopolistic the market is, the stickier pricing becomes. Even in markets with a host of competitors, rivals often take into account the prices charged by other companies when they set their own prices. In the digital economy, as in the physical one, economic actors often use tacit collusion and implicit agreements to maintain prices at a certain level, the authors conclude.

Companies may also seek price rigidity when demand is changing. The researchers contend that companies use their inventories to buffer demand shocks and use nonprice elements, such as quality and service, to support price stickiness. So, for example, increased demand may result in longer waiting times rather than higher prices; less demand might lead to improved service rather than lower prices. In the case of e-commerce, where issues such as seller reputation are vital, the strategic use of nonprice elements is also likely to lead to price rigidity.

The fourth theory of price rigidity has to do with nominal and implicit contracts with consumers. The authors cite Amazon.com’s short-lived online experiment selling certain products to different customers at different prices. This antagonized customers: Their unwritten agreement with the online retailer, they thought, was that everyone paid the same amount for every item. Amazon swiftly halted the practice.

When e-commerce does foster price flexibility, it usually has to do with the nature of “asymmetric information.” Asymmetry assumes that either the firm supplying a product/service or its customer possesses more information than the other. The digital economy reduces the price rigidity caused by information asymmetry, because it is a more transparent business environment. As a result, imprecise perception is trumped by real knowledge. Therefore, some companies will cut prices to gain economic and strategic advantages, such as increased market share and customer loyalty.

Overall, however, the authors argue, there is no e-commerce pricing free-for-all. Even in cyberspace, traditional laws of economics apply.


Marketing’s Role in Growth
George S. Day (dayg@wharton.upenn.edu), “Marketing and the CEO’s Growth Imperative,” unpublished. Click here.

George S. Day, the Geoffrey T. Boisi Professor of Marketing at the Wharton School, provides a strong case in his paper “Marketing and the CEO’s Growth Imperative” that companies court risk when they marginalize the role of marketing in the growth strategies essential to meeting the challenges of demanding customers, shareholders, and competitors.

Professor Day says that marketing is left out primarily because, as is the case with any functional area, it tends to become bogged down in short-term tactical priorities. Taking care of today’s business is always more pressing than making plans for tomorrow’s growth. Professor Day cites the belief shared by such strategy experts as Clayton Christensen, Richard Foster, and Gary Hamel that marketing is simply too close to customers and too focused on what the competition is doing today to play a productive role in achieving the required breakthroughs by which future growth is achieved. (See “Bring on the Super-CMO,” by Steve Silver, s+b, Summer 2003.)

 
 
 
 
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