Understanding Digital Markets


Review and Assessment

Michael D. Smith
MIT Sloan School

Joseph Bailey
University of Maryland

Erik Brynjolfsson
MIT Sloan School

Forthcoming in Erik Brynjolfsson and Brian Kahin, eds. Understanding The Digital Economy, MIT Press, 1999.


Download the PDF version of the paper.



As the Internet develops into a robust channel for commerce, it will be important to understand the characteristics of electronic markets. Businesses, consumers, government regulators, and academic researchers face a variety of questions when analyzing these nascent markets. Will electronic markets have less friction than comparable conventional markets? What factors lead to dispersion in Internet prices? What are the major electronic commerce developments to watch in the coming years? This paper addresses these questions by reviewing current academic research, discussing the implications of this research, and proposing areas for future study.

We review evidence that Internet markets are more efficient than conventional markets with respect to price levels, menu costs, and price elasticity. However, several studies find substantial and persistent dispersion in prices on the Internet. This price dispersion may be explained, in part, by heterogeneity in retailer-specific factors such as trust and awareness. In addition, we note that Internet markets are still in an early stage of development and may change dramatically in the coming years with the development of cross-channel sales strategies, infomediaries and shopbots, improved supply chain management, and new information markets.