Because the Internet encourages the free flow of information, it promises to revolutionize how people shop and how prices are set.
Usually this will mean smaller margins for sellers as consumers comparison shop in highly efficient marketplaces. But sometimes the opposite will happen, and sellers will find ways to charge more - at least to certain customers and for certain kinds of products.In 1995, I introduced the term "friction-free capitalism" to describe a marketplace in which buyers and sellers have almost perfect knowledge of the true supply and demand for a particular product. The Internet is moving us in this direction.
Most products are commodities on one level or another. For example, numerous companies make television sets that are roughly equivalent, and any given model is available from a multitude of retailers. Consumers have abundant choices.
To the extent a product is a commodity, consumers get better buys as the marketplace becomes more efficient. Superstores and mail-order houses have gradually improved the efficiency of the marketplace in recent years, driving prices down.
In the United States, at least, neighborhood appliance and camera stores have been forced to be more competitive (and often settle for smaller margins).
The Internet is accelerating the trend toward efficient markets. People can browse from retailer to retailer readily. Over time, software will automate the process of comparison shopping, and "haggling" over prices will become electronic and effortless.
As it becomes easier for consumers to discover the lowest prices, suppliers and retailers who charge too much will see business suffer.
This raises a question: Will people who don't shop for low prices get them anyway? Sometimes they won't. Sellers will use technology to extract the highest price they can from a particular shopper, especially if the goods or services aren't commodities. This is an extension of pricing practices that are common today.
Flexible prices are a fixture of the marketplace. Many electronic and appliance stores advertise price guarantees in which theypromise to match the lowest price a consumer has identified. This lets them say they won't be undersold, even if their marked prices are relatively high.
Some department stores run so many sales that there are really two prices for most items - the regular price for the typical shopper and the sale price for the patient shopper. Airlines and hotels extract as much as they can for seats or rooms booked at the last minute.
When an automobile dealer shows a sticker price but entertains lower offers from price-sensitive consumers, it is setting dif-ferent prices for different consumers.
Two people in the dealership at the same time may get different prices for identical cars, possibly because one seems more willing or able to pay than another.
Direct-mail marketers often publish different prices in different catalogs. When you call to order, the sales representative first asks for your customer number or catalog number - often so that the company knows what to charge you. If you call a toll-free number, the merchant may know who you are without even asking.
The goal of these and similar pricing strategies is to capture the low-margin business of price-sensitive shoppers while harvesting higher margins from sales to shoppers who aren't as diligent or flexible. These techniques are fairly crude, however, next to what the Internet will make possible.
Interactive technology allows sellers to know the identities of the people they are selling to, or at least to know that a specific repeat visitor is returning.
A Web site can recognize you when you log in with a member password or if the site reads an identifying number it has previously recorded to your hard disk.
These numbers, called "cookies," also enable Web sites to provide you with personalized information and services. (Many sites won't function properly, or give a very gratifying experience, if they can't record and read cookies freely.)
Once a Web site knows more or less who you are, it can provide personalized information of various kinds. It may offer news or information of interest to you or display advertising that corresponds to what it believes are your inclinations.
If a Web site you visit frequently comes to know what kinds of prices you have or haven't been willing to pay in the past, it may reduce a price to spur you to buy - or raise one if your pattern suggests that you're not particularly price-sensitive.
I don't know how many Web sites are personalizing prices today, but many will in the future.
After all, it's just an extension of pricing behavior that is already common in the conventional marketplace.
Keep in mind, though, that in the long run this approach will only work for distinctive goods and services. When a Web site offers you a product, it will take only a few seconds for you to discover whether the price is competitive. Any product that resembles a commodity -and most do - will be driven down in price by the efficiency of the Inter-net as a marketplace.
Pricing strategies for distinctive products (non-commodities) could become quite interesting in the future, as computers and the Inter-net make new, profitable schemes practical. Sellers who have something unique to offer will discover that the efficiency of the Internet works in their favor.
For example, once recordings are distributed mostly online, the world may see music by particular artists priced according to the income (or assumed income) of the specific buyer. If you're a typical teenager, buying music would be pretty cheap. But if you're a highly paid professional, you might pay twice as much.
Setting prices according to an individual's ability to pay may sound radical, but the idea is as old as progressive taxation. College educations are priced this way, with a discount called "financial aid" that varies according to family income and assets.
New pricing schemes will arise. Already, a new type of disc, a variant on DVD called Divx, is being promoted. It is a new form of pay-per-view that allows people to watch a movie for a limited period before it expires.
Music may be sold on a pay-per-hearing basis, too. You may pay a few cents each time you listen to individual songs, rather than paying a flat fee for unlimited use of an album. Fees for hit songs, and especially new hit songs, may be higher than the fees for older songs.
Presumably, high-volume consumers of music (teenagers!) would still be able to buy unlimited rights to listen so that they don't overspend. But the occasional listener would save by paying on a per-play basis.
I don't really know how this will all work out, of course. Consumers will decide, ultimately, through their purchasing patterns. Divx, for example, will succeed or flop based on consumer reaction. So will pricing schemes tailored to the Internet.
What I do know is that the potential of the Internet to create nearly friction-free markets will lead to innovation in how products are priced. Because the vast majority of products are commodities, consumers will be winners most - but not all - of the time.