Online retail is the talk of the day in this modernized, making it an easier task for a consumer to shop products of his choice than to rather go physically to a store and buy goods. This facility is fast growing in this Internet world. Free shipping and cash on delivery are some of the schemes that act as eye catchers and finally the store gets promoted.
Online retail has many cost advantages to what are typically referred to as "brick and mortar" physical stores. Here are a few:
Location - One "store," the online site, can sell to customers nationwide, even world-wide.
Staffing - A small team of technicians and administrators can keep the website operational and updated, compared to a much larger team of sales people, managers, merchandisers, inventory handlers, security, etc that are required to operate a physical store.
Rent - Rather than a physical store in a prime retail location, a small office space with a few desks, computers, and a server room can accommodate the staff of a large retail website.
Inventory - This is perhaps the biggest one. The most successful online retailers don't actually stock many, if any, products. They process orders and have the merchandise shipped directly from the vendor to the customer. This means they do not have to tie up capital in on-hand inventory or run the risk of getting stuck with outdated product that will be sold at a loss.
So a company's website can, typically, sell its products at a much lower price than its physical stores for the reasons listed above. Prices are determined the way that any of their prices are determined: Using market analysis to find what a customer is willing to pay for a product so that it does not become a liability, and then balancing that with the company's need to turn a profit and the offerings of its competition. Just remember that the cost of doing business online is usually far less, so there is still the same profit to be made even if the product is sold for much cheaper than it was in the stores. Then it is determined what price can be charged online without making their in-store offering look over-inflated.
It is reasonable to assume that the Internet allows consumers to compare competing online merchants’ prices more cheaply than they can those offered by offline stores. Visiting an online merchant’s Web site to find a price almost certainly takes less time than visiting or even calling an offline merchant for the same information. Consumers can compare prices offered by competing online outlets has led online sellers to compete on price more intensely than their offline counterparts, leading to lower online prices. In most models of consumer search, given search costs and knowledge of the price distribution, a consumer determines how many stores to visit and purchases from the lowest price firm observed; he will visit an additional store only if the expected gain is greater than the cost of search.
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Due to the low cost of comparing online prices, by contrast with its offline counterparts, an online seller rationally may expect that almost all of its patrons have visited – or will visit – a large proportion of its online competitors. The online firm, then, must set its prices on the assumption that anyone visiting its Website has seen the lowest online price offered. Accordingly, we would expect to see online prices for homogeneous goods to be lower and less dispersed than those offline; indeed, in the limiting case where all online consumers are perfectly informed about competitors’ prices and view all online vendors as perfect substitutes, a zero-profit Bertrand equilibrium obtains.