Lead, Follow, or Go Your Own Way: Empirical Evidence Against Leader-Follower Behavior in Electronic Markets

TL;DR

This study analyzes online retail price data and finds little evidence of leader-follower pricing behavior, suggesting that most retailers do not engage in anti-competitive price matching, and provides a methodology for future monitoring.

Contribution

It offers empirical evidence against prevalent leader-follower behavior in online markets and introduces a methodology for detecting anti-competitive price matching.

Findings

Most retailers do not follow leader pricing strategies.

Observed leader-follow behavior is linked to managerial convenience.

Provides a methodology for future anti-competitive behavior detection.

Abstract

Low search costs in Internet markets can be used by consumers to find low prices, but can also be used by retailers to monitor competitors' prices. This price monitoring can lead to price matching, resulting in dampened price competition and higher prices in some cases. This paper analyzes price data for 316 bestselling, computer, and random book titles gathered from 32 retailers between August 1999 and January 2000. In contrast to previous studies we find no evidence of leader-follow behavior for the vast majority of retailers we study. Further, the few cases of leader-follow behavior we observe seem to be associated with managerial convenience as opposed to anti-competitive behavior. We offer a methodology that can be used by future academic researchers or government regulators to check for anti-competitive price matching behavior in future time periods or in additional product categories.