Understanding the confluence of retailer characteristics, market characteristics and online pricing strategies

Theories from Information Systems, Marketing and Economics suggest that product, retailer, and market characteristics jointly serve as determinants of online retailers' ability to price differentiate. Until now, the empirical research has focused on examining the impact of these determinants in isolation. In this paper, we extend the prior online price dispersion literature by examining the interactions among product, retailer and market characteristics. We construct a multi-level hierarchical linear model to empirically test whether market level characteristics moderate retailer characteristics in explaining price dispersion. Our analysis is based on a dataset of 13,393 price quotes for 1880 best selling products across eight product categories from 194 online retailers. The analysis indicates that service quality has a positive effect on retailer price levels. We observe that the relationship between competitive intensity in a market and retailer price levels is inverted “U” shaped. In contrast, the influence of the interaction between a retailer's service quality and market level variables on retailer price levels is “U” shaped. These findings together provide the first known empirical evidence for the existence of mixed pricing strategies among online retailers. Contrary to conventional wisdom, we find that retailers providing quality service are able to charge higher prices as the competition increases.