THE INFLUENCE OF PREAND POST-PURCHASE SERVICE ON PRICES IN THE ONLINE BOOK MARKET

YONG CAO AND THOMAS S. GRUCA

YONG CAO
is assistant professor of marketing at the University of Alaska Anchorage; e-mail: afyc@uaa.alaska.edu

e examine the ability of customer ratings of pre-purchase and post-

purchase service to explain price variations in the online book market. In addition, we test whether market leaders leverage their branding advantage by charging higher prices. E-tailer prices were modeled using a market basket of identical books whose posted prices were sampled repeatedly over a 4-month period. Contrary to expectations, posted prices were relatively constant across the time period that included a highly competitive 2000 holiday selling season. E-tailers whose customers were more satisfied with the level of postpurchase service charged significantly higher prices. Differences in satisfaction with pre-purchase service did not explain price differences across all e-tailers. The higher prices of the three market leaders were most likely due to higher

THOMAS S. GRUCA
is associate professor of marketing at the Tippie College of Business, University of Iowa; e-mail: thomasgruca@uiowa.edu

This paper is based on the second

satisfaction ratings for both pre- and post-purchase satisfaction. We discuss

essay from Yong Caos Ph.D. disserta-

the implications of these results for managers and academics.

tion and is party supported by a faculty development grant from the
2004 Wiley Periodicals, Inc. and Direct Marketing Educational Foundation, Inc. JOURNAL OF INTERACTIVE MARKETING VOLUME 18 / NUMBER 4 / AUTUMN 2004 Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/dir.20018

University of Alaska Anchorage. The authors thank K. Sivakumar for his constructive comments.

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INTRODUCTION
Internet pricing is an important field of study for academics and managers. Just as consumers can easily compare prices across Web merchants, e-tailers themselves have the capability to monitor each others prices and swiftly change their own prices in response to competitive moves or shifts in demand (Baker, Marn, & Zawada, 2001). In such an environment, many had predicted a steep, downward spiral ending in uniform pricing across the surviving Web retailers (e.g., Sinha, 2000). However, empirical studies of prices on the Internet have found little evidence of uniform pricing. Prices for the same product can be significantly different across e-tailers (e.g., Bailey, 1998; Brynjoffson & Smith, 2000; Pan, Ratchford, & Shankar, 2002, hereafter, PRS, 2002). Understanding the sources of these price differences is a very active area of research. In this paper, we examine two possible explanations. First, if an Internet retailer offers better services, then it may be able to charge more for its products, reflecting the additional value it provides customers (Grewal, Gopalkrishnan, Krishnan, & Sharma, 2003). An e-tailer is essentially a service provider with two basic functions: (1) to provide information about products and prices to customers before a purchase is made (e.g., Zhang & Von Dran 2002) and (2) to physically deliver the products to the customers after a purchase (Bhise, Farrell, Miller, Vanier, & Zainulbhai, 2000). We define pre-purchase service as the delivery of information about products and prices to customers before a purchase and post-purchase service as the physical delivery of products to customers after a purchase, order tracking of the product delivery, and other supporting activities. Just as product quality has many dimensions (Garvin, 1987), service quality is also multidimensional. Furthermore, some dimensions of service quality may be more important than the others in explaining price differences. Extending this idea to Web-based retailers, we determine whether pre-purchase service is more important in explaining price differences across e-tailers than is post-purchase service. These results may shed light on how managers can invest in preand post-purchase services to increase gross margins. The second possible explanation for differences in prices across e-tailers is the variation in competitive

positions. We expect that market leaders charge higher prices since their brands are more well known and their sites are more trustworthy (Urban, Sultan, & Qualls, 2000). To measure the ability of pre/post-purchase service levels and market leadership to explain differences in e-tailer pricing over time, we collected prices of an identical market basket of books from eight e-tailers for 4 months. We also collected ratings of customer satisfaction with these e-tailers pre-purchase and post-purchase service from BizRate on the same dates. Using a mixed model with both fixed and random effects, we modeled the e-tailers price levels as a function of the satisfaction ratings and market leadership. Unlike prior research using similar data (e.g., PRS, 2002), our model includes both cross-sectional and multiperiod measures of prices and satisfaction with e-tailer service. We have a number of important findings. First, we find that the differences in satisfaction with pre-purchase services do not contribute to explaining price differences across all e-tailers. Second, we find that all e-tailers with higher satisfaction ratings for postpurchase service charge significantly higher prices. This may be due, in part, to compensate for much higher costs to effectively maintain higher levels of postpurchase service (Bhise et al., 2000). Third, our analysis suggests that market leaders charge significantly higher prices in the online book market. However, this price premium reflects the increased levels of pre- and post-purchase satisfaction reported by their customers. This is one of the few Internet pricing studies with repeated measures of posted prices over time. We find that there are very few changes in the posted prices we measured, even though our data span the very competitive holiday shopping season. This suggests that e-tailers in this market do not often take advantage of their capabilities to change posted prices easily.

LITERATURE REVIEW
The information-rich environment for Internet buyers and sellers as well as the ease of changing prices has motivated a great deal of research regarding prices online. For example, Brynjolfsson and Smith (2000) compared prices for books and CDs sold through Internet stores and conventional stores in 1998 and

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1999. They found prices on the Internet were 916% lower than those in conventional outletseven after accounting for costs from shipping and handling, delivery, and local sales taxes. A more recent study using 1999 and 2000 data on CD prices by Lee and Gosain (2002) confirms this result for back catalog items (older releases). More recently, the focus has shifted to explaining observed differences in prices between online retailers. A study of price dispersion by Clay, Wolff, and Fernandes (2001b) used an objective approach, characterizing the service provided by an e-tailer using a checklist of Web-site features and attributes. However, this method ignored variations in implementation across online retailers. While most Web sites have an area dedicated to customer service, follow-through from an e-mail query is likely to vary widely. Consequently, important variations in the level of service provided to customers might not be fully represented by a binary measure of whether a particular feature is present or absent from a given Web site. In contrast, PRS (2002) used a consumer-based approach to measure differences in the service offered by various e-tailers (Holbrook & Corfman, 1985). They examined the ability of e-tailer ratings from BizRate.com to account for cross-sectional variations in the prices of individual products across a number of categories. While their use of consumer evaluations of e-tailer performance represents an important advance, their results may be limited due to their single time period of data. Tellis and Wernerfelt (1987) suggest that only through repeatedly measuring the price and service levels over time and testing the time evolution of a price premium can one demonstrate whether the relationship between these two constructs is consistent. Therefore, we collected a crosssectional, time series of product prices and consumer ratings of e-tailer service for our empirical study.

the subject of previous studies on Internet pricing (e.g., Bailey, 1998; Clay, Krishnan, & Wolff, 2001a, 2001b; PRS, 2002) providing important guidance in our model formulation. Since the products being sold do not vary across e-tailers, the basis of competition shifts to pricing, assortment, and service (Grewal et al., 2003; Alba et al., 1997). We incorporate all of these elements into our study. We developed three hypotheses on the ability of consumer ratings of pre-purchase services and post-purchase services as well as market leadership to explain variations in e-tailer prices. To begin the buying process, an online customer will have to first navigate an e-tailers site, make a selection, and submit payment as well as delivery information. We consider all of these elements of the pre-purchase service offered by the e-tailer. After the transaction is completed, the customer will then experience the postpurchase service provided by the e-tailer. Obviously, consumers will encounter an e-tailers post-purchase service only after they experience the pre-purchase service process. The customer must satisfactorily navigate the site and proceed through the ordering process to complete a transaction. If this process is abandoned prematurely, the e-tailers level of post-purchase service will be irrelevant. Therefore, we expect that e-tailers are very likely to compete on the basis of pre-purchase service. This assertion is supported by a Boston Consulting Group study that found 28% of online shoppers who suffered a failed purchase attempt stopped shopping online altogether while a further 23% stopped purchasing at the site in question (Boston Consulting Group, 2000). Pre-purchase services that save customers time, effort, and frustration are important aspects of transaction convenience (Berry, Seiders, and Ggrewal, 2002: 7). Moreover, transaction inconvenience represents an opportunity cost to consumers. Therefore, e-tailers who provide higher levels of pre-purchase services should charge higher prices since they allow consumers to avoid incurring these unwanted opportunity costs. This is our first hypothesis. H1: E-tailers with higher levels of pre-purchase service charge higher prices.

DETERMINANTS OF PRICE DIFFERENCES ACROSS E-TAILERS

The setting for our study is the online book market. We focused on this category for two reasons. First, the physical products, i.e., books, offered by the various e-tailers are identical. Second, this category has been

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One view of Internet shoppers holds that they are only interested in the lowest price (e.g., Sinha, 2000). In contrast, Reichheld and Schefter (2000) claim that the largest segment of online shoppers are more interested in convenience and are willing to pay more for it (p. 110). In its experience, Dell Computer found that post-sale services including on-time delivery, product representation and customer service are key drivers of customer loyalty (Reichheld & Schefter, 2000: 112). Upon realizing the importance of post-purchase services to consumers, Amazon.com spent more than $300 million in 1999 for facilities to improve the quality of the post-purchase service it provides to customers (Hof, 1999). E-tailers with limited resources will not be able to effectively compete on the basis of post-purchase service due to higher costs. For example, firms will have to build infrastructure to speed up delivery, e.g., better control systems and a high level of inventory (Reichheld & Schefter, 2000). In addition, the e-tailer will have to hire more account managers to deal with post-sales problems, including complaints and product returns. In order to recoup such investments, e-tailers offering high levels of post-purchase service are likely to charge higher prices overall. Therefore, we have the following hypothesis: H2: E-tailers with higher levels of post-purchase service charge higher prices.

reflecting the opportunity cost of finding an alternative product to replace a failed one. Hoeffler and Keller (2003) suggest that strong brands have the greatest impact on consumer behavior during the choice process. When faced with unfamiliar or potentially risky buying situations, consumers often rely on strong brands to reduce the aforementioned risks. Buying from an Internet retailer poses similar risks as well as new ones, including problems with privacy of personal information and payment security. Consequently, many shoppers perceive more risk when they shop on the Internet compared to shopping in traditional stores (Hoffman, Novak, & Peralta, 1998). Due to their well-known brands, Internet market leaders are more highly trusted by consumers (Urban et al., 2000). Having a well-known brand reduces the risks for consumers in doing business with a market leader online. This reduction in risk may be leveraged by market leaders in the form of higher prices. In contrast, nonleaders may charge lower prices to entice trial and reward risk taking by consumers. Therefore, we propose the following hypothesis. H3: Market leaders charge higher prices. To test the above hypotheses, we collected longitudinal data containing prices and customer ratings of e-tailers pre- and post-purchase services. We describe our model development in detail in the next section.

MODEL DEVELOPMENT AND ESTIMATION

Measures
As in the PRS (2002) study, we use consumer ratings of e-tailer service from the Internet marketing research company BizRate, which collects data from a panel of more than 200,000 Internet shoppers. BizRate is a marketing research company founded in 1996 (Conlin, 1999). Its revenue comes from two major sources. The first is selling detailed reports about their customers to e-tailer clients. In 1999, data provided by BizRate were chosen by the nonprofit Consumers Union, publishers of Consumer Reports, to provide information to their subscribers about consumers online experiences (Conlin, 1999). Second, BizRate is a shopping portal. BizRate collects a commission from each sale initiated

Market Leadership
E-tailers differ in terms market position. Some e-tailer brand names are household names while other sites are virtually unknown. Internet pioneer Amazon.com created its market position in the online book market through extensive advertising (both online and offline). Other competitors such as Barnes and Noble and Borders share a strong brand name with a chain of traditional retail stores. Branding has an important role in reducing the risks consumers face when buying a product. Keller (2003: 8) identifies a number of these risks ranging from the financial risk of paying too much to the time risk

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through its Web site (Weintraub, 2000). The addition of e-commerce capabilities has greatly increased the popularity of the BizRate.com site. Measurement of Pre-Purchase Service. BizRates measures of the e-tailers pre-purchase service are collected after a panelist confirms his or her order. BizRate uses a number of promotional vehicles to encourage participation with their survey. For example, in order to encourage panelist participation, BizRate offers the opportunity to win $50 in a Spin and Win game as well as entry in a future drawing for a $1,000 prize. Cooperating panelists rate their satisfaction with various aspects of the e-tailers pre-purchase service. In addition, the panelist indicates the expected time of delivery of the ordered merchandise. The respondents are asked, How satisfied are you with each of the following aspects of this online purchase? This is followed by a list of the elements of pre-purchase service: ease of ordering, product selection, product information, and Web site performance. Customers respond using a 10-point scale with 1 = not at all satisfied and 10 = highly satisfied. These measures of pre-purchase service are consistent with the current academic research regarding online customer care (e.g., Lohse & Spiller 1998; Seiders, Berry, & Gresham, 2000; Szymanski & Hise, 2001). Measurement of Post-Purchase Service. BizRate sends a follow-up survey to the same respondent via e-mail a few days after the expected order delivery date. Respondents rate aspects of the e-tailers postpurchase service including on-time delivery, order tracking, product representation, and customer support. These measures use the same 10-point scale with 10 indicating a high degree of satisfaction. As before, these measures are consistent with current thinking reported in the academic (Lohse & Spiller, 1998; Seiders et al., 2000) and practitioner (Hall, 2000; Reichheld & Schefter 2000) literature regarding building a business online. Price. One of the major differences between this study and the PRS (2002) study is our unit of analysis. In the PRS (2002) study, the unit of analysis was the individual book. In our study, the e-tailer was the unit of analysis. The primary reason we used a market basket approach was to more closely align the units of analysis of the dependent and independent

variables since the BizRate data are reported only at the store level. To reflect price differences across e-tailers, we used a market basket of nine titles, including best sellers, childrens books, and reference books (Bailey, 1998). The list of titles is available from the authors. Every book in the market basket was available from the eight selected e-tailers over the entire period of study. The other major difference is that we have repeated measures of both prices and buyer satisfaction with pre and post purchase service. We collected these data 17 times between September 30, 2000, to February 9, 2001. In total, we had 1224 individual price observations (8 e-tailers 9 items 17 time periods) compared to 1,155 price observations (11 e-tailers 105 items 1 time period) in PRS (2002). The eight Internet retailers were A1books.com, alphacraze. com, Amazon.com, Barnesandnoble.com, Books-aMillion.com, Borders.com, ecampus.com, and FatBrain.com. To measure the degree of price changes over time, we constructed a price index similar to Dulberger (1989). We identified the minimum market basket price at the beginning date of the observation period (September 30, 2000) as the base price. We normalized the prices of the other market baskets by dividing by the base price and then multiplying the result by 100. The resulting price index tells how much the market basket of books has increased or decreased in price, compared to the lowest priced market basket in the first week of data collection. For the purpose of cross validation, we examined the correlation between the normalized market basket price and a measure of consumer price satisfaction (provided by BizRate) at the store level. We would expect that customers would be more satisfied by lower prices, all else being equal. The correlation between the normalized market basket price and the measures of price satisfaction is 0.67 (p 0.00). This negative and significant correlation suggests that our market basket measure of prices captures perceived price differences across e-tailers. One of the critical issues surrounding using posted prices on Internet Web sites is the cost of shipping and handling. It is often suggested that a Web site may

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entice the customer with lowest posted price and then charge a very high amount for shipping and handling. We examined the relationship between the posted book prices and the shipping and handling charges for the e-tailers in this sample. We found that Internet stores with higher prices also tended to have higher charges for shipping and handling. Therefore, we concentrated only on the posted prices in our analysis. Further details are available from the authors. Market Leadership. Trust online is determined by shoppers familiarity with a site (Urban et al., 2000). We used overall measured traffic (number of unique visitors) as a proxy for the overall familiarity of customers with various Web sites in our sample. Three of these Web sitesAmazon.com, Barnesandnoble.com, and Borders.comaccounted for more than 95% of the traffic for the eight stores during the time of our study (the data were collected from netratings.com, which track the Web site traffic for a few thousand Web sites). These same Web sites were identified as market leaders by prior research (Clay et al., 2001b). Market leadership is included in our models as an indicator (1 market leader, 0 otherwise) variable.

above formulation) takes into account nonobservable differences across e-tailers, i.e., those differences other than variation in ratings of pre- and postpurchase satisfaction and market leadership. We introduce the levels of pre-purchase service and post-purchase service as fixed effects into the base model. In addition, we introduce an indicator for market leadership as a fixed effect. The resulting Model 2 is considered a mixed model since the observed variations in the price of an e-tailers market basket is explained by fixed factors (pre-purchase, postpurchase, and market leadership measures) as well as the aforementioned random effects (time, firm, random error). Model 2 is given below. Yit m b1 * Preit b3 * Leaderi b2 * Postit ai gt eit, (2)

where Preit is the summated score of the four BizRate measures of satisfaction with pre-purchase service (see Table 1), Postit is similarly defined for postpurchase service, and Leaderi indicates whether firm i is a market leader as defined above. We estimated both Models 1 and 2 using the data we described above. We used a maximum likelihood procedure to estimate the model parameters. Next, we present our empirical results.

Model Formulation
Since we have repeated measures of price and satisfaction with pre- and post-purchase service, our model has to accommodate both cross-sectional and longitudinal data. Therefore, we used a variance component model in which the e-tailers pricing is represented as a time component, a firm component and random error (see Model 1 below). Yit m ai gt eit, (1)

EMPIRICAL RESULTS
The summary statistics for the measures of prepurchase and post-purchase service are presented in Table 1. We used Cronbachs alpha to assess the unidimensionality of the measures of pre-purchase and post-purchase service. Using the data from the first two observations, the alpha statistic for the four measures of pre-purchase service (ease of use, product selection, product information, and Web site performance) is 0.94. The alpha statistic for the four measures of post-purchase service (on-time delivery, product representation, order tracking, and customer support) is 0.97. Therefore, we conclude that these measures are unidimensional. (Note: A factor analysis of the same data yields a two-factor solution that explains more than 95% of the variance. The factor loadings using a varimax rotation are consistent with our pre- and post-purchase constructs. Details are available from the authors.)

where Yit denotes e-tailer is price of the market basket at time t (normalized as discussed above), m is the intercept which represents the mean level price of the market basket at the beginning of the observations, ai represents the variance component due to the firm i, gt represents the variance component due to the date t, and eit represents the error term. We assume that ai, gt, and eit follow independent normal distributions with a means of zero and variances of s2, s2, a g and s2. e One advantage of this approach is that the variance component associated with firm differences (ai in the

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TABLE 1
CONSTRUCT Pre-purchase service (alpha = 0.94*)

Summary Statistics of Pre-Purchase and Post-Purchase Services

MEASURES a. Ease of use b. Product selection c. Product information d. Website performance Summated score (all e-tailers) (sum of ad) Leaders Nonleaders

MEAN 8.89 8.81 8.43 8.74 8.63 9.00** 8.40 8.37 8.75 8.26 8.29 8.40 8.75** 8.20 17.03 17.75** 16.60

STD. DEV. 0.44 0.45 0.47 0.51 0.51 0.41 0.43 0.77 0.47 0.92 0.72 0.68 0.21 0.75 0.97 0.39 0.95

Post-purchase service (alpha = 0.97*)

e. On-time delivery f. Product representation g. Order tracking h. Customer support Summated score (all e-tailers) (sum of eh) Leaders Nonleaders

Total service

Summated score (all e-tailers) (sum of ah) Leaders Nonleaders

* Based on first two cross-sectional observations. ** Difference between leader and nonleader means significant at p < 0.01 level.

Since these measures are unidimensional, we will discuss our results in terms of the summated scores for the four measures of pre-purchase services and the four measures of post-purchase services. We present the summary statistics in Table 1 in the rows marked Summated Score.

93% of the total. We conclude that, during the 4-month period covered by our sample, differences in prices across e-tailers are based more on firm-specific variations than on variations across time. This is a surprising result. One of the great advantages of pricing on a Web site compared to a typical retail store is the ease with which prices can be changed (Sinha, 2000; Baker et al., 2001). Even though our sample time period spanned the highly competitive holiday season (i.e., Christmas 2000), we found that posted prices were relatively unchanged. An interesting area for future research would be a similar longitudinal study of prices of technology products such as computers, which are known to drop significantly over time as new models are introduced. For Model 2, which includes the fixed factors of satisfaction ratings for pre/post-purchase services and an indicator for market leadership, the total variance

Model Estimation Results

We used the SAS TSCSREG procedure to estimate the variance component model for the time-series, cross-sectional data. The estimation results for Models 1 and 2 are presented in Table 2. Random Effects. The total variance for Model 1 is 106.52, which consists of the sum of 0.06 (time), 99.19 (firm), and 7.27 (random error). In this model, the variance accounted for by the time-specific effects only 0.06/(106.52) 0.05% of the total while the variance due to firm-specific effects is 99.19/(106.52)

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TABLE 2

Estimation Results for Variance Component Model

RANDOM EFFECTS VARIANCE COMPONENT Date Firm Error MODEL 1 ESTIMATE 0.06 99.19 7.27 MODEL 2 ESTIMATE 0.29 31.0 6.04 FIXED EFFECTS VARIABLE Intercept Pre-purchase service Post-purchase service Market leadership Market leadership pre-purchase service Market leadership post-purchase service Market leadership total service MODEL 1 ESTIMATE (STD. ERROR) 119.27** (3.53) MODEL 2 ESTIMATE (STD. ERROR) 57.24** (17.88) 0.13 (1.14) 6.93** (1.64) 13.14** (4.33) MODEL 3 ESTIMATE (STD. ERROR) 59.30* (24.05) 0.65 (4.02) 7.17** (2.69) 0.79a (3.63) 0.80a (3.59) 0.80** (0.25) MODEL 4 ESTIMATE (STD. ERROR) 62.23** (3.39) 0.73 (1.18) 6.90** (1.64) MODEL 3 ESTIMATE 0.58 34.97 5.71 MODEL 4 ESTIMATE 0.42 30.46 5.84

* Significant level at 0.05. ** Significant level at 0.01.

a

The average pre-purchase service score for market leaders is 9.0 and 8.75 for post-purchase service (Table 1). Therefore, the normalized prices of a market basket offered by a market leader should be (0.79 * 9.0) (0.80 * 8.75) 14.11 higher than that of a nonleader. This is comparable to the coefficient of 13.14 for the Market Leadership dummy variable in Model 2.

is 37.4. When we compare this result to the total variance of 106.52 for Model 1, we see that the addition of these fixed effects explains (106.52 37.4)/ 106.52 65% of the variance in the normalized market basket price. Clearly, the addition of these fixed effects greatly improves the fit of the model. Fixed Effects. The R2 for Model 2, which includes the measures of satisfaction with pre- and postpurchase services and the indicator for market leadership, was 0.16. This is comparable to the model fit (R2 0.12) in the cross-sectional model in PRS (2002).

The coefficient for the measure of pre-purchase service is negative but not significant ( 0.13, t 0.11). Therefore, hypothesis H1 is rejected for the sample as a whole. This result is consistent with the crosssectional model of PRS (2002). Three of the four measures in our pre-purchase services construct are also found in their convenience factor. PRS (2002) found that variations in their convenience factor did not explain variations of cross-sectional prices across the books in their sample. With respect to our measure of post-purchase service, the results are very different. The coefficient is

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positive and significant (6.93, t 4.23). Therefore, we find strong support for hypothesis H2. This result indicates that all e-tailers with higher levels of post-purchase service charge significantly higher prices. These results are very different from the PRS (2002) study. They found that cross-sectional variations in book price across e-tailers were negatively related to consumer ratings of post-purchase service. (Their factor reliability contains the same measures as our construct.) One possible explanation for these results lies in the differences in the unit of analysis in their study compared to this study. Recall that our data are analyzed at the store-by-time level. The PRS (2002) unit of analysis was the individual product-by-store level. During the time period covered by their data collection (November 2000), major book e-tailers such as Amazon.com, Barnesandnoble.com, and Borders.com were continuing to offer substantial discounts on best sellers to drive traffic (Kirkpatrick, 2000). At the same time, the customers of these etailers reported significantly higher levels of satisfaction with post-purchase service (versus nonleaders). Consequently, if the PRS (2002) sample of products included a large proportion of best sellers (as opposed to back list books), their negative relationship between relative price and post-purchase service would make sense. In contrast, our market basket of books contains comparatively few best-selling titles. The relationship between market leadership and the normalized price of an e-tailers market basket is significant and positive in Model 2 (13.14, t 3.04). Therefore, hypothesis H3 is supported. However, a closer look at the data suggests that market leaders are charging higher prices because they are providing a more satisfying shopping experience rather than merely extracting monetary value from their wellknown brands. We test this conjecture by first examining the average levels of satisfaction between market leader e-tailers and the other e-tailers for both pre- and post-purchase service. As we noted above, the post-purchase satisfaction ratings for the three leaders in the online book market were significantly higher than those of the other e-tailers. The same is true of satisfaction ratings for pre-purchase service (see Table 1).

Therefore, if the higher prices charged by market leaders are simply reflecting their more satisfied customers, then interaction terms involving market leadership and satisfaction with pre- and postpurchase service should be positive and significant. We designate this as Model 3. Yit m b4 ai b1 gt Preit Preit eit. b2 Postit b5 Postit Leaderi (3)

Leaderi

As we see in Table 2, both of the coefficients (b4 and b5) are positive, but neither is significantly different from zero. Ignoring the issue of significance for the moment, consider the relative magnitude of the price differences suggested by these results. Using the average satisfaction scores for market leaders from Table 1, we see that the normalized prices of a market basket offered by a market leader should be (0.79 * 9.01) + (0.80 * 8.75) 14.12 higher than that of a nonleader. This result is essentially the same results as the market leader indicator in Model 2 (b3 13.14). Examining the correlation matrix of the variables used to estimate Model 3, we found that two interaction variables are very highly correlated (r = 0.997). This would result in inflated standard errors of the parameter estimates. Dropping one of the two interaction terms would likely result in a biased estimate of the parameter for the retained interaction term. Instead, we combined the satisfaction ratings for preand post-purchase service into a new variable called total service (see Table 1). In Model 4, we replaced the two interaction terms in Model 3 with a single interaction between total service and market leadership. Model 4 is: Yit m b6 b1 Preit Totalit b2 Postit ai gt eit, (4)

Leaderi

where Totalit is the sum of Preit and Postit. The results of our model estimation may be found in Table 2. The interaction term (b6) is positive and significant (0.80, t 3.24). Using this parameter estimate and the average value of the Total variable for market leaders, we would expect that the price difference between the

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market baskets of the leader and nonleader e-tailers would be (0.80 * 17.75) 14.2, essentially the same results as we obtained from Models 2 and 3. Note from the results of the various formulations that the standard error of b1, the coefficient for satisfaction with pre-purchase service does not drop below 1. This confirms our previous assertion that ratings of prepurchase service do not significantly contribute to explaining price differences across e-tailers.

results are an interesting contrast to those of PRS (2002), who found that post-purchase service (their factor label was reliability) was not significantly related to price in the DVD, desktop computer, software, or electronics markets. In fact, this same factor was negatively related to price levels in the book market (as we noted above) and the laptop computer market. Only in the CD and PDA markets was postpurchase service positively related to posted prices. PRS (2002) speculate that their null results may be based on a lack of differentiation between various e-tailers with respect to their levels of post purchase service. In our data, there is less differentiation in the entire sample when you compare the variances of the pre-purchase satisfaction measure (0.265) with that of the post-purchase satisfaction measure (0.434). [The difference between these variances is significant (paired t-test 3.67).] So, our experience in this study with the null result for pre purchase service (for the entire sample in Model 2) suggests there is some basis for this assertion. However, we also believe that the unit of analysis (product vs. e-tailer) may be having some effect on these results. Perhaps the most provocative result from this study is that market leaders are not necessarily charging higher prices in an effort to leverage the strength of their brands (a trust premium). The higher prices charged by leaders in the online book market are commensurate with superior satisfaction experienced by their customers. Whether these market leaders actually provide a demonstrably better experience than other sites cannot be determined by BizRate type data. Maybe there is some halo effect from buying from a market leader that leads to higher satisfaction ratings. Or perhaps shoppers new to the Internet might buy from market leaders and rate them higher out of ignorance of the experience available from other sites. If many new customers use BizRate-type information to evaluate Web sites, higher satisfaction ratings provide an additional demand side advantage of market leadership that is worthy of more study. Our experience with the market leadership indicator variable in Models 24 suggests a reconsideration of some prior research. This is especially true of studies combining category level indicators (e.g., Internet-only

DISCUSSION
Our analysis of prices over time yielded a surprise almost as large as the persistence of price differences in the frictionless Internet market place. While industry commentators have focused on the ease with which Internet retailers can change prices, our study examines whether e-tailers take advantage of this capability. We find that overall the posted prices we measured essentially did not change over the time period covered by our study. Examining the coefficient of variation (COV standard deviation/mean) of the market basket index across time by e-tailer, we find that the highest value was less than 5% (for 2 e-tailers) and the average COV was less than 2%. Whether or not changing posted prices often is a profitable strategy in this market is an open question. However, it is clear that the chaos of price moves and countermoves made possible by easy changes in price menus is not evident in our sample of products, e-tailers, and time frame. From the results of Model 2 above, one might conclude that e-tailers wishing to improve their margins need not worry about providing high levels of prepurchase service. That would be a mistake. Satisfaction with pre-purchase service does not explain price differences in the entire sample of e-tailers. However, market leaders do charge higher prices commensurate with their customers higher level of satisfaction with their pre-purchase service (Model 3). In contrast, post-purchase services explain variations in prices across all e-tailers. Given the significant positive relationship between post-purchase services and prices, e-tailers are trying to extract monetary value from superior post-purchase performance. These

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stores) with measures of store-level differences. In the PRS (2002) study, Internet-only stores had significantly higher prices in the book and software markets while the same types of stores had significantly lower prices in the entertainment (CD and DVD) and computer (laptop and desktop) markets. Some of these variations could have actually been reflections of differences in the levels of the BizRate satisfaction scores between Internet-only and other types of online stores. More research on this topic is important to avoid ascribing pricing power, or the lack thereof, to the wrong sources. This study has a number of limitations that help point out directions for future research. First, customer ratings from a source such as BizRate are a sample from customers who have successfully completed a transaction. There is probably a level of positive bias in these measures that we cannot easily ascertain. In this study, we limited ourselves to e-tailers in the online book market. It will be interesting to see how these results generalize to other areas of online selling using the e-tailer rather than the product as the unit of analysis. The lack of price changes over time precludes our using a dynamic model wherein higher levels of post purchase satisfaction in one period would allow e-tailers to increase their prices in the next. Testing such models would require panel level data on purchases, ratings of Web sites, and use of promotions such as coupons. Such data have not yet found their way into academic studies. As with any empirical study of the Internet, our results are tied to a particular point in time. Given the ever-evolving nature of the Internet and online retailing, the relevance of these findings may change as online retailing matures. What will not change is the high level of academic and practitioner interest in the topic of Internet pricing.

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