E-Commerce Economics

Who is the current online shopper? Based on a study performed by Jupiter Communications and NFO, 61% of all purchasers are men, and “young adults” (18-34) comprise the largest age group of online buyers. Not surprisingly, since most of online shopping requires credit card purchasing, teens and kids comprise the smallest proportion of Internet shoppers.


Specifically, while online users gave competitive price a nine out of ten rating on “importance,” they only rated it a 7.5 on “satisfaction”. Research reveals that the majority of online shoppers review three to five sites before making a purchase. Although, online buyers, whether using an agent or not, do not necessarily always choose the lowest price. Agents can give buyers a pretty good idea of choices, but in the end, the consumer weighs many factors before keying in that credit-card number, among them merchant name recognition, trustworthiness, and track record.

Commodity goods or “search” goods dominate the total online purchases thus far. When asked to list items purchased online, 50.8% of online buyers reported purchasing books and 50.6% reported purchasing software. Higher income online users have a higher propensity to make purchases, with almost 50% of users from wealthy households having purchased online. However, middle-income households comprise the largest percentage of overall online buyers, due to the fact that they are by far the largest overall user segment.

There is also a high correlation between the user’s familiarity with the Internet and the propensity to shop online. Close to 70% of online users who have used the Internet for over two years have either browsed or bought online in the last year. As the use of the Internet expands across demographics in the coming years, so will the profile of the online shopper.


While price is an important determinant of customer choice, branded retailers and retailers a consumer visited previously hold significant price advantages in head-to-head price comparisons. Consumer loyalty can also provide pricing power; consumers are willing to pay more to buy from a retailer they have visited previously. While ShopBot consumers appear to be price sensitive, 51% of them choose an offer that is not the lowest price returned in a search – factors other than price influence consumer choice. Retailer brand identity is at least one of the factors influencing consumer behavior. While branded retailers have the lowest price for only 15% of the book searches, they make up 27% of consumer choices. Likewise, the top three unbranded retailers, who have the lowest price 36% of the time, make up only 26% of consumer choices.

Sites like amazon.com, barnesandnoble.com, and borders.com are “branded retailers”. Using almost any reference point, these are the most heavily advertised and well-known retailers in the Internet book market. For example, based on a search of Altavista, these 3 retailers make up 97% of the total number of Internet links to EvenBetter’s retailers. Similarly, according to Lexis Nexis, these retailers make up 93% of the references in the press.

Shopbots Causing Economic Destruction?

The rise of agent-based shopping could be destructive. It raises the possibility of a world in which retail shops providing valuable services are destroyed by an economic process that funnels a large percentage of consumer sales into what becomes a commodity market without middlemen: people use the high-priced premium cyber store to browse, but then use a bargain finder to purchase.

People have been using this strategy to purchase for decades: draw on the sales expertise of the premium store, and then buy from the warehouse. But the scope and ease of this strategy is about to become much greater. To merchants providing helpful shopping advice, the end result will be as if they spent all their time in their competitors’ discount warehouse, pointing out goods that the competitors’ customers ought to buy. The only people who will pay premium prices for the physical good will be those who feel under a moral obligation to do so (and thus pay for browsing and information services). Thus Cyber stores that offer browsing assistance may find that they have common interests with the physical stores in the mall, which fear that consumers will browse in their stores, and then go home and buy sales tax-free on the Internet.


Customers are very sensitive to how the total price is allocated among the item price, the shipping cost, and tax, plus customer server can influence the ranking of retailer offerings with respect to price. Consumers use brand as a proxy for a retailer’s credibility with regard to non-contractible aspects of the product bundle such as shipping time.

At some point soon it will become practical to charge for everything on the World Wide Web. Whether it will become economically feasible, or common, remains to be seen. The outcome of this battle will have profound economic and social consequences. Which vision will dominate absent government intervention depends in part on the human motivation of programmers, authors, and other content providers. Government will surely be called upon to intervene.

Written by David Jurus