A study on the test of market efficiency with comparison between internet and conventional pricing

Abstract

Internet has become the most important part of daily life and the number of Internet users has been increased dramatically. Since Internet has become an important part of business and economic activities, numerous researches describe the Internet as a tool that has changed the world and some economists describe it as a tool that facilitates the perfect competition market. This study aims to verify this claim by looking at retailers’ prices of books and CDs. Through Internet search engines, consumers can find the product with lowest price and highest quality more easily than before. This results in the decrease in price since suppliers compete with price. By reducing search costs, buyers will be able to access more products and purchase products that match their needs better which in turn enhances the economic efficiency. This study tests the economic efficiency of Internet market with two hypotheses. Hypothesis 1 is to examine whether price level of the Internet market is lower than the conventional market. Hypothesis 2 states that the price of Internet market is less dispersed than that of conventional market. Our analysis suggests that Internet retailers charge lower prices than conventional retailers do. This result is not sensitive to the use of either posted price or full price in our analysis. Thus, this finding supports the hypothesis 1 that the Internet provides a more efficient channel for the products we track. We also find that the dispersion of Internet retailers’ posted prices is highest whereas the dispersions of full prices of both Internet and conventional retailers exhibit no significant difference. The result is not consistent with previous studies hence it seems that the development of Internet commerce is on the way of development. Despite the meaningful implications, our results are subject to several limitations. First, until 2000, consumers had to pay full amounts of the listed prices in Korean book market, because pricing poli...