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Internet Price Discrimination, Self-Regulation, Public Policy and Global Electronic Commerce

The Internet as a medium for commerce is only in the beginning stages of development. Already there are a proliferation of entrepreneurs and Fortune 500 companies alike trying to gain market share and brand name recognition while Internet commerce is still in its infancy. This early stage of Internet commerce involves experimentation of strategy and pricing to determine how to best position oneself for future profits. It is too early to tell whether Internet commerce today is representative of a market anomaly or is indicative of the future. Regardless, there are some unique aspects about the Internet which make it an excellent marketplace to test economic theory. Internet commerce may reduce market friction. While it is difficult to formulate such a hypothesis in a testable form, this paper uses transaction cost economics, game theory, and menu costs to describe how a reduction in market friction may impact commerce on the Internet. The paper outlines four testable hypotheses and presents the results from an exploratory data set of over 30,000 observations to show that there may be more friction in Internet commerce than anticipated. Specifically, no data was found to support the hypotheses of pure price competition. However, there was data to support the hypothesis that reduced menu costs allow for more frequent price changes. Specifically, menu costs may be reduced to the point where prices can be rendered and changed dynamically. The ability to change prices dynamically for price discrimination purposes is the focus of this paper. The paper describes why price discrimination is attractive to Internet retailers and how they can implement such a system. The paper then describes market features in the absence of regulation which may ensure protection of consumer surplus. Finally, the paper explores ways in which regulation can prevent Internet retailers from price discriminating both from self-regulation and government regulation perspectives. The paper concludes with a discussion of the drawbacks of federal or global policies at this time and recommends self-regulation of the industry along with market forces to keep price discrimination practices at bay. Internet Price Discrimination 1