Oleksandr Talavera Provides Insight into Price Setting in Online Markets at the Open Research Seminar Held at the NBU
OREANDA-NEWS. At the beginning of the week, the National Bank of Ukraine hosted an open reserach seminar at which Mr Oleksandr Talavera, a Reader of Finance at the University of Sheffield presented the results of his research on “Price setting in online markets: Basic facts, international comparisons, and cross-border integration”.
In their research Mr Talavera and Mr. Yuriy Gorodnichenko, Associate Professor at the University of California (Berkeley), collected information for more than 140,000 goods that were traded online in the U.S. and Canada in 2008. The reason why they focused their research on this problem was that E-commerce is a rapidly growing market and online markets’ behavior exhibits significant difference from that of offline markets. It is easier to search for the best prices in online markets while comparing price differentials within and across countries. Price comparison for identical goods is easy across stores. The physical cost of changing prices is negligible for internet stores. Goods sold online are easy to ship and the geographical location of consumers and stores is largely irrelevant in e-commerce. Therefore, it is nearly impossible to discriminate consumers based on their location.
Preliminary research has shown that online prices tend to be lower than offline ones. The research findings suggest that prices in online markets exhibit stronger pass-through and faster convergence in response to movements of the nominal exchange rate, as compared to prices in regular stores. The researchers have found out that, on average, the pass-through in online markets amounts to approximately 60-75 percent, which is greater than the 20-40 percent pass-through documented for regular markets.
There is significant heterogeneity in pass-through and the speed of price adjustment across goods. If a commodity is very cheap or very expensive, the pass-through is less significant. For mid-priced goods and commodities, the higher the price is, the higher the pass-through is larger. Competition in online markets contributes to reducing exchange rate pass-through. Further increases in the number of sellers are associated with decreasing pass- through and the speed of price adjustment.
The research findings suggest that prices in online markets exhibit stronger pass-through and faster convergence in response to movements of the nominal exchange rate, as compared to prices in regular stores. The speed of price adjustment to equilibrium levels is substantially faster in online markets (half-life is about 2-2.5 months) than in regular markets (half-life varies from 3 quarters to a few years).