Working Paper: NBER ID: w9085
Authors: Austan Goolsbee; Judith Chevalier
Abstract: Despite the interest in measuring price sensitivity of online consumers, most academic work on Internet commerce is hindered by a lack of data on quantity. In this paper we use publicly available data on the sales ranks of about 20,000 books to derive quantity proxies at the two leading online booksellers. Matching this information to prices, we can directly estimate the elasticities of demand facing both merchants as well as create a consumer price index for online books. The results show significant price sensitivity at both merchants but demand at Barnes and Noble is much more price-elastic than is demand at Amazon. The data also allow us to estimate the magnitude of retail outlet substitution bias in the CPI due to the rise of Internet sales. The estimates suggest that prices online are much more variable than the CPI, which understates inflation by more than double in one period and gets the sign wrong in another.
Keywords: price sensitivity; online competition; consumer price index; retail outlet substitution bias
JEL Codes: L8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Demand at Barnes & Noble (Y92) | A change in price at Barnes & Noble results in a larger relative change in quantity demanded compared to Amazon (D43) |
| Prices of online books exhibit greater variability than those reflected in the consumer price index (CPI) (E31) | CPI understates inflation due to this variability (E31) |
| Price movements at Amazon and BN.com (D49) | Retail outlet substitution bias in the CPI (L81) |