Internet Search. Background Information Dramatic collapse in the stock prices of leading E-retailers. Etoys, an online shop selling toys, had a market.

Internet SearchInternet Search

Background Information Dramatic collapse in the stock

prices of leading E-retailers. Etoys, an online shop selling toys,

had a market capitalization: Year 1999: $10 billion Year 2000: only $4 million on the verge of bankruptcy

Reasons for the collapse High fixed costs

advertising website development not just one time set up costs

Low price-margin internet search technologies create Bertrand-

like competition Price searching business is becoming more

and more important as the E-retailing business is more and more popular

Flow of report Introduction to search engine How search engine affect business

online? Question and Answer

Price Search Price Search Engine

websites specified in finding out the lowest price offered in the internet by E-retailers

will direct you to the website of retailers

Price Search 2 kinds of search engine: Database-based Shopbot-technology-based

Price Search Database-based: Firms directly enter prices and

item descriptions into the database Use a web-based interface to enter

and change the price Pricewatch.com, Shopper.com

Price Search Prices listed can be changed Firms can complete with each

other Shopper.com – change twice a day Pricewatch.com – unlimited times a

day

PRICE WATCH ® Pricewatch.com

Database-based facility specified in searching computers components E.g memory, CPUs, motherboard...etc

Firms listed: mainly small firms large number of small business in this segment

without advertising or web development costs the major channel to reach customers:

Pricewatch

Search Engine Revenue E.g Shopper.com $1000 one-time, non-refundable fee Additional $100 at the beginning of

each month Firms receive over 250 qualified leads:

Qualified lead – a consumer ‘clicks-through’ from the Shopper.com site to a firm’s site

$0.5 per lead for first 50,000 leads $0.6 per lead for each additional

PRICE WATCH ®

ResellerRatings.com Evaluate companies who sell

computer products enable people to post feedback on

companies

How Internet Search Work Search the Internet Building the index Search for indexed data

Price Search Shopbot-technology-based: Shopbot - An automated search

engine that visits multiple E-retailers’ sites to collect information about prices and other attributes of goods and services MySimon.com

Search the Internet Example: Google.com

Use of multiple spiders Use of special software robots “Spiders”

Starts at popular sites Indexing words on web pages Follow links and spread out Store the indexed data for later access For

system sent 4 spiders at a time Crawl over 100 pages/sec Generate 600kB/sec

How spider works?

Building the index Select information and method of

indexing Assign weight to each entry

Words in titles can more heavily weighted

Different search engine have different weighting methodology different ranking

Other information will be stored e.g. Font size

STOP SEARCHING! Possibility of improper usage

“Search engine spamming” “Child care” in web site selling children clothing Use of “playboy”, “playmate” in a website and

had been sued by Playboy

Bargain Finder by Brian Krulwich Search online CD stores for the best price Over 100,000 users in the first 2 months 3 out of 8 online CD stores the program

searched decided to prevent its search on their web sites

a highly scalable information retrieval system advanced parallel search technologies

Offer instant product comparison User link to merchant’s “buy” page for easy

purchasing.

Pricing strategy

Commission model charge the sellers a commission of 2%-

5% of each sale

Sponsor model charge the sellers a certain amount of ad

fee

On one hand,

Merchants are willing to be “comparison-shopped” because the Web traffic they get is motivated to buy.

On the other hand,

Retailers never like to be side by side with their competitors want to build brand on their own

Empirical Studies: Data Price data: hourly data of certain

pre-selected products from Pricewatch.com

Sales data: from one internet retailer Little advertising Most traffic is from Pricewatch

Other data: ranking of firms lowest price

Empirical Results Extremely high elasticity in

demand Negative cross-price elasticity

Empirical Results Prices are only about 2% above marginal cost

Bertrand competition even efficient, budget-conscious retailers

that did not advertise could hardly survive

Cross-price elasticity of demand for a higher quality product with respect to the price of low-quality product

Empirical Results Given the limited capabilities of search engine,

consumers’ only option is to first use the price search engine to get a list of the websites offering the lowest price for any memory module,

and then to follow some hyperlinks provided to find the price of the product that best fits their preferences.

Obfuscation – Bait-and-switch “Bait-and-switch”

offering a low quality product at a very low price to attract customers

and then try to convince them to pay extra to get another product of higher quality in the website

Obfuscation – Bait-and-switch

Higher quality product with higher price are advertised on the websites Better warranty and return policies. Eg, CPU without fans VS CPU with fans

Search Engine Revenue Paradox Revenue of Search Engine

Retailer’s side: membership fee, referral fee

E.g. Yahoo! Shopping: 2% gross profit

Consumer’s side: membership fee

Search Engine Revenue Paradox Retailer’s Side

Bertrand-like competition making no profit will not pay much to be listed

Consumer’s Side no price dispersion unwilling to pay for the information

How do E-retailers survive? Limitation of search engine One cannot ask a search engine to find

“decent-quality memory modules sold with reasonable shipping, return, warranty and other terms”

How do E-retailers survive? Cheating!!! Obfuscation

make it difficult for consumers to compare prices

increase search cost

Obfuscation – Mattress Case

Search and Obfuscation do not start with the internet

Phone – an effective method for comparing prices Mattress case: Retailers use different model names to hinder price

comparison Only 2 out of 44 have same model names

Obfuscation – Hidden cost Offering a low price with unreasonable

shipping and handling fees Unattractive contractual terms: Consumers: return shipping and 15-20%

restocking fee on all returns. (Include defective product)

very short warranty period Now: give a range or put “and up” after the

number

Obfuscation For shopbot-technology More prone to obfuscation Incorrect prices and matches E.g: Yahoo! Shopping

“128MB PC100 SDRAM” 5 lowest prices: $0!! Incorrect memory module

Obfuscation Some firms state that offered prices are not

available through the website and require consumer to call on the phone.

While other retailers state that the prices on Pricewatch are only available through the website and do not apply to phone orders.

Tools those Search Engines Use

The search business is also more focused on making money. Without a profit, search sites won't be around.

They're doing their best to match advertisers with potential shoppers.

Different search sites show their sponsor search results with different degree of transparency, and some may even be misleading.

Commercial Interests Affect Real Result

A site owner who pays a search engine to be included receives a guarantee that the site's pages will be frequently revisited.

Search engines, e.g. AOL and MSN, are able to manipulate results and prevent competitors’ sites form showing up.

Search engines also places sponsored links before other non-partner links in the real results.

Sites that Pay

Metasearch engines are even worse, and they become meta-yellow pages because they query paid listings.

However, one search engine, Google, opposes and claims that treating a smaller list of sites differently isn't fair.

Are Ads All Bad? Ads can be useful, depending on what you're

searching for. If you're shopping for something specific, sponsored links can often lead you to reputable e-commerce sites.

E.g. "Palm M130“ If you search for "Palm M130" on any of the

major sites, you'll get links to several stores, and often to ads or sponsored links with the latest prices.

Search and Obfuscation A game of balance of power

Improvement in information technology

decrease or sometimes increase the search costs

Search engine case: Consumers: wish to lower search cost Retailers: wish to raise search cost

Conclusion

While the internet clearly facilitates search, it also allows firms to adopt a number of strategies that make search more difficult.