Kendall C Hulet and Dr. Scott Sampson, Business Management

Information asymmetry is usually defined as a market failure that increases transaction costs. Buyers and sellers in a typical market transaction have varying degrees of information on which to base their decisions, whether it be about the quality of the good or service, or about the optimal price of the good or service. If perfect market efficiency is the ideal, asymmetry of information usually results in too high a price being paid for a particular good or service.

It is apparent that product and pricing information has become much more readily accessible to the end consumer since the advent of the Internet. It would stand to reason, in such an environment, that this reduction in asymmetry of information would typically improve market efficiency by increasing price competition, which in turn would reduce price premiums and thereby reduce sellers’ profit margins. Thus, price ranges for homogeneous goods would narrow as competition became more fierce. Interestingly enough, however, studies suggest that the range of prices, known as price dispersion, is actually higher online than offline for particular homogeneous goods. These studies of online price dispersion support the hypothesis that consumers may prefer to pay a price premium for a homogeneous good from a retailer they trust. Trust signaling may be more important in an online environment than in a conventional marketplace.

Further studies indicate that brand recognition plays a significant role in consumers’ willingness to pay a price premium. Heavily branded retailers are able to charge a price premium over other less recognizable retailers. The findings of these studies suggest that consumers are willing to pay a price premium for a homogeneous good from a retailer they recognize and hence trust. I began to wonder if there was another possible cause for high levels of price dispersion in online markets—the trust signals sent by the physical appearance of the store. My study focused on effects of store appearance on price dispersion in the absence of brand recognition in both online and offline markets.

I showed subjects the interior and exterior pictures of several conventional bookstores. I also showed subjects the homepages and other screenshots of several online bookstores. The subjects then rated each of the stores on an incremental scale based on their perceptions of the store’s physical attractiveness and the store’s credibility.

I then measured the correlation between attractiveness and credibility, and found that there is a correlation between attractiveness and credibility in both online and offline markets. The level of correlation is higher for online stores than for offline stores, suggesting that consumers may rely more heavily on visual cues of physical attractiveness to assess a store’s credibility in an online environment than in an offline environment.

I then asked the subjects to choose the store with which they would be most comfortable making a purchase from each group, as well as the store with which they would be least comfortable in making a purchase. The relationship between perceived credibility and store preference was statistically significant. I also asked the subjects how much of a discount it would take (in percent) to entice them to shop at their least preferred store rather than their most preferred store in both offline and online instances. I then compared the difference with price dispersion data (price ranges for books online and offline). Because the required discount range identified in the study may be used as a proxy for price dispersion in online and offline markets, the results may show that the range of required discounts, on average, would be larger for online stores than for conventional stores, under conditions of similar appearance variation. Therefore, it would be expected that for books and other relatively homogeneous physical goods, a higher degree of price dispersion would exist in the online market than in the conventional market, all other things being held equal.

It is important to note that the subjects did not recognize any of the stores. I eliminated all result sets in which a subject recognized a store or brand in order to control for the effects of brand recognition.

In essence, I found that, as hypothesized, people may rely on visual cues of physical appearance to assess a store’s credibility, and that physical appearance in the absence of brand recognition may be more important to feelings of credibility for online stores than for offline stores. Additionally, my study’s findings support the findings of other research in that they indicate there is a higher level of price dispersion online than offline for books.

Conducting this research and writing a thesis in relation to my research has been an incredibly difficult but rewarding effort. I have learned much from the constant help of my great research advisor, Dr. Scott Sampson. His insights have helped me learn more about the scientific process, statistical analysis, and rigorous methodology. I hope to use this research and the lessons it has taught me as a springboard into future doctoral studies.