Academic journal article International Journal of Electronic Commerce Studies

Why Expect Lower Prices Online? Empirical Examination in Online and Store-Based Retailers

Academic journal article International Journal of Electronic Commerce Studies

Why Expect Lower Prices Online? Empirical Examination in Online and Store-Based Retailers

Article excerpt

ABSTRACT

This study extends prior research by examining consumer expectations regarding the lower price of products found in online shopping stores and considers the role of overhead cost in consumer decision-making. By using a laboratory experiment method, we verified the difference in the perceived overhead cost between the two types of retailers and the relationship between perceived overhead cost and internal reference pricing. This study involved 123 subjects. The findings show that consumers perceive online retailers' overhead costs as lower than store-based retailers' overhead costs and that lower perceived overhead prices cause consumers to have lower internal reference prices. This study supplements e-commerce research, can assist retailers in understanding consumers' perceptions of overhead cost and product prices, and serves as a reference for online retailers attempting to create pricing strategies.

Keywords: Overhead Cost, Price Perception, Internal Reference Price, Online Retailers, Store-Based Retailers

1. INTRODUCTION

Because of the immense commercial potential of online shopping, the number of products and services found online is increasing1,2,3,4. Consumers do not see a difference between products purchased online and at store-based retailers. However, there are systematic differences in how consumers perceive and react to the price of products purchased online5, 6, 7. Consumers believe that the prices of products purchased online should be less than those at store-based retailers5, 8, 9, 10, 11, 12, 13and that it is unfair when Internet prices are equal to or higher than those of store-based retailers10. Some studies have shown that lower online prices are not only a consumer expectation; online prices are actually lower than store-based prices, although this may depend on the type of product1, 14, 15, 16, 17.

Previous studies have presented discussions on why most consumers expect to obtain lower prices online. The main reason is that consumers believe that online retailers have lower overhead costs than do store-based retailers1, 5, 8, 18. Most consumers believe that online retailers use low costs to attract consumers and that online retailers benefit from cost advantages more from this than a brick and mortar store-based retailer5.

Although prior studies have concluded that perceived lower overhead cost explains why consumers expect to find lower product prices online, supporting evidence is lacking. Thus, this study verifies whether consumers believe that online stores have lower overhead costs and whether this belief affects their internal reference price toward products. To simplify the statement that consumers perceive online prices should be lower than store-based prices, we call this belief the Expectation of Lower Prices Online (ELPO) according to Lo et al.19. In addition, we term the belief that online retailers' overhead costs should be lower than those of store-based retailers the Expectation of Lower Overhead Cost Online (ELOCO) to enable easy future citation. The empirical results of this study are important to online vendors to understand consumers' perceptions of overhead cost and product prices, and to consider how to raise product price by reversing consumers' perception of online overhead costs.

2. THEORETICAL BACKGROUND

2.1 The Expectation of Lower Prices Online

Numerous studies have examined factors influencing online shopping behavior. Van Tassel and Weitz20 demonstrated why online shopping appeals to consumers: convenience, complete product information, and competitive prices. Ernst and Young21 argued that convenience and greater savings are the main motivators for shopping online. Bakos22 found that lower prices attract consumers to online markets. Yu23 indicated that consumers who shop online are more concerned with monetary value, lower market price, and special offer goods. Ramanathan24 showed that comparative prices and refunds and returns are desirable criteria for customers to return to the same website to shop. …

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