E-Commerce: The End of Fixed Prices?

Although we all grew up in a period where fixed prices have been the norm rather than the exception, that hasn’t always been the case. The notion of having a set price for a good became the dominant mode in retailing after the Civil War, when improvements in transportation, distribution and information systems meant that merchants could no longer compete simply on availability.

Fixed prices had several benefits. First, it forced manufacturers to differentiate their products. If manufacturer "X" wanted to charge 10 percent more for an item than manufacturer "Y," the additional features and benefits had to be clear and understandable.

Second, fixed prices removed much of the anxiety for buyers. Indeed, the two consumer areas where bidding and bargaining remained commonly used were in buying cars and buying existing houses. And the buying experiences in both areas were extremely stressful because the sellers generally had more information about the product than the buyers. The bargaining process wasn’t fair.

Today, the online marketplace has afforded the consumer more choices and purchasing avenues. Here’s a true story that should be preserved as legend or myth: According to The Wall Street Journal, while surfing the Net, Alan Greenspan (yes, that Alan Greenspan) learned that he could purchase a videocassette recorder for less online than he could at his local electronics store.

So, what did this scourge of higher prices do? He bought it at the store and didn’t even haggle over the price. It wasn’t worth the fight, he reportedly told friends. So much for personal inflation fighting!

The story highlights several issues triggered by the growth of e-commerce. First, even the chairman of the Federal Reserve Board surfs the Web to get product information. Second, buying decisions rely on several different factors – price is only one. Third, and perhaps most interesting, is the question of whether e-commerce will lead to the end of fixed prices.

There once was a time when you walked into your local electronics store and expected to pay the posted price. Now, Alan Greenspan’s friends expect him to bargain with a salesperson on the selling floor at Best Buy.

Let’s Make a Deal

Bargaining for goods and services is one of the most visible impacts of the rise of e-commerce over the past couple of years. In addition to the high-profile consumer auction sites, such as eBay (www.ebay.com) and reverse auction sites like priceline.com (www.priceline.com), Web and Internet technology, coupled with deregulation has led to a host of business-to-business markets emerging in areas, such as energy, financial services, computers and electronics, chemicals and office supplies.

In the $1.4 trillion chemical industry, for example, companies like ChemConnect (www.chemconnect.com) and CheMatch (www.petrochemnet.com) have created real-time trading systems for buyers and sellers. In computers and electronics, companies, like USBid.com (www.usbid.com), are helping manufacturers, distributors and Fortune 500 companies auction excess goods that are still under warranty.

Perhaps, the most well-publicized new markets to emerge via Internet technology have been the electronic communications networks (ECNs), used to buy and sell stock and options listed on the NASDAQ and other smaller stock exchanges. Not only have ECNs taken a healthy share of all NASDAQ trades executed, they have pioneered "after hours" trading. They clearly are agents of change. Of course, the NASDAQ itself was the result of advances in computer-base communication.

These pioneering efforts are precursors of what Bear, Stearns analysts Scott Ehrens and Peter Zapf see as a major trend toward what they call "metamediaries." In a recent study called "The Internet Business-to-Business Report," Ehrens and Zapf coined the phrase to describe multi-vendor, multi-product marketplaces in which additional services, such as procurement management, quality assurance, fulfillment and payment settlement, are also available.

In the past, Ehrens and Zapf write, business-to-business e-commerce was aimed at point-to-point data transfer, such as EDI implementations or centralized data collection. Metamediaries and the growth of online markets, represent the next step, they contend, in business-to-business e-commerce.

One of the common features found in many of the online markets is the use of a bidding system for goods. Obviously, people are used to bidding when they buy stocks. In that, however, is where the risk comes and is the reason so many people unfortunately lose money in the market. So it is not clear if the move to bidding in other areas of e-commerce will be generally beneficial or simply add risk to the buying process.

In large companies, business-to-business commerce has often been a combination of fixed price and bargaining. E-commerce could tip the scales toward bidding and bargaining. For that to benefit buyers, however, the amount of information available about what’s for sale has to keep pace as well. And even if it does, there will always be those who simply don’t want to bargain.

About the Author: Elliot King is an Associate Professor of Communications at Loyola College in Baltimore, Maryland. He can be reached at (410) 356-3943, or via e-mail at eking2@prodigy.net.