The shopping basket: a blend of physical and virtual?
The advent of online retailers has completely changed how we shop. Dr Subir Bose looks at multi-channel e-tailing and asks if our very concept of a "shopping basket" is becoming more fluid.
Every day, people all around the world buy and sell goods. An individual can enter a shop, browse the aisles, and fill their shopping basket with items as they please. However, the advent of the Internet has significantly affected the way our societies carry out economic activities, and the nature of the shopping basket has changed.
For thousands of years, economies have looked for institutions to facilitate trade in the form of markets, bazaars, brick-and-mortar shops. Online trading has opened up a whole new mode of buying and selling. It has changed the transaction cost of trade and as a result has expanded the range of goods that can be bought and sold. In a real-life auction, a venue is needed and buyers have to be contacted and brought together. There are no physical venues in online auctions and buyers can bid asynchronously from the comfort of their own homes. Sellers can create virtual shops, allowing them to find buyers quickly and efficiently.
While many aspects of online trading can be analysed and explained using traditional economic theory, it raises some interesting new questions. As one example, many online auctions have a feature called a 'buy-now' option. This is a hybrid between standard auction and posted-price selling. Particularly puzzling is the fact that these hybrids are often used in environments where other well-known formats – a standard auction without the buy-now add-on – are known to be more profitable. Why would a seller add a feature that seems to 'damage' the auction?
One explanation could be that online auctions typically last longer and there might be impatient buyers willing to pay to not wait till the end of the auction. A subtler explanation is in terms of what economists call 'screening'. Often sellers who use this format are 'multi-channel' sellers using traditional venues and online auction sites to 'target' different types of buyers. The add-on feature, seen in isolation, may appear strange. However, it makes the overall selling method more effective. The profit the seller sacrifices at the online auction site is more than compensated by the higher profit the seller is able to earn from the other venues.
So, what about the future of the shopping basket? Will we see a complete disappearance of physical stores? Since predicting the future is hazardous I leave this difficult task for the reader and instead make two observations. First, businesses can earn more profit by using multiple selling venues and it is not clear why they would want to give that up. Secondly, can online stores duplicate all the services that physical stores provide? When buying clothes, many people still prefer to go to a store and try them on before purchasing than to buy them online. Individuals who order groceries online still benefit from the presence of the corner shop when they need something in a hurry. While physical stores will adapt as online trading evolves, is it easy to imagine a future when walking into a store, picking up a shopping basket, and browsing the aisles is no longer present in our lives?
- Bose, S. and A. Daripa, 'Optimal sale across venues and auction with a buy now option', Economic Theory, January 2009, vol 38, Number 1, pp. 137-168. View the online document via RePEc
Dr Subir Bose
- Game Theory
- Mechanism Design
- Industrial Organisation
I am willing to supervise broadly in areas of pure and applied microeconomic theory. I would be especially interested in supervising research in the areas of:
- Game theory
- Mechanism design (especially with ambiguity averse preferences)
- Online auctions
- Industrial organisation