Can Prominence Matter Even in an Almost Frictionless Market?

Firms pay to compete for the top slot within search engines such as Google. The first result for a search for “toys,” for example, will show a paid placement followed by organic search results generated by an algorithm. How search results influence buying and price-shopping habits within the online ecosystem — and what ultimate benefit it has for businesses — is a matter of ongoing economic and marketing research.

A 2011 paper from the University of Oxford published in The Economic Journal, “Can Prominence Matter Even in an Almost Frictionless Market?” models two different scenarios relating to purchasing behaviors and optimal search engine site strategy. In each model, the consumer is searching for products, has a good idea what each product should cost, wishes to conduct the transaction online, searches for relevant merchants using a portal such as Google and then evaluates the search results. The study’s author uses mathematical modeling to draw his conclusions about how such markets function.

Key findings include:

• When there is no prominent merchant listed in the search results, the consumer either buys his desired product on the first site on the list if it conforms to his price expectations or he considers additional search results.  But “once these consumers have incurred the search cost, they are prepared to pay slightly more” for the product.
• In the scenario in which price is the primary variable, if a website charges a slightly higher price for the product but is situated higher on the rankings list, 50% of consumers already planning on buying the product from that site will continue to do so despite the higher cost, suggesting that small increases in price can be profitable.
• However, the balance of consumers in this scenario will purchase the product from a different website, and fluctuations in a website’s ranking ensures that its position in the results change from search result to search result.
• In the scenario in which search result placement is the primary variable, the prominently placed website significantly benefits from its ranking position by increasing its overall number of sales and enabling it to lower the cost of its product, obviating the need for evaluating additional search result options. “The prominent firm is always at least 25% cheaper than any of its rivals, serves at least 50% more customers, and earns at least 12.5% more profits.”

The author concludes that “it is very easy for interested parties to influence the order in which consumers search when they are online. It is therefore possible that far from removing pricing distortions, the Internet could easily end up increasing them.”

Tags: consumer affairs, technology

Tags: consumer affairs, technology

By Margaret Weigel October 28, 2011