Academic journal article Journal of Theoretical and Applied Electronic Commerce Research

Subjectivity of Diamond Prices in Online Retail: Insights from a Data Mining Study

Academic journal article Journal of Theoretical and Applied Electronic Commerce Research

Subjectivity of Diamond Prices in Online Retail: Insights from a Data Mining Study

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1 Introduction

Diamonds are a very unique consumer product. At the first glance, there is no apparent utility of owning a diamond. Although it is considered the hardest gem, that is 58 times harder than anything else on Earth [19], few people use diamonds for this utility. One of the most apparent reasons for owning or wearing diamonds lies in their perceived value as being rare and expensive objects. Although diamonds have been considered valuable objects for millennia, the consumption of diamonds significantly changed in the 20th century when it became customary to give diamond rings as engagement gifts. De Beers, the largest player in the diamond industry, has been using a slogan 'a diamond is forever' to encourage such gifts since 1948 [42]. Global sales of diamond jewelry in 2015 reached $79 billion, with the United States being the largest market, contributing $39 billion to total sales [5]. The demand for polished loose diamonds, globally was $25 billion in 2014 [4]. The top five markets for diamonds are the United States, China, India, Japan and the Persian Gulf region.

Traditionally diamonds were sold in jewelry stores. The Diamond District in New York City and the Diamond Quarter in Antwerp have been global centers for diamond trade. With the proliferation of electronic commerce, more diamonds are sold on the Internet, allowing for a broader consumer reach. While the perceived value of a diamond may be affected by the price paid [32], diamonds also have well-defined physical properties: weight, cut and color among them. In addition to expanding the potential markets for diamonds, the growing popularity of online commerce is expected to reduce the consumer search costs and make it easier for consumers to compare diamond prices in relation to diamond physical properties and do so across different retailers [1]. The reduction in the online consumer search costs and the ease of comparing physical diamond properties through online search would be expected to make diamonds more like a commodity product, whose value is determined by the physical characteristics.

The goal of our research is to explore the relationship between the physical properties of diamonds and diamond prices to understand the degree to which diamond prices are determined by the physical characteristics. To answer this question, we perform data mining on a large dataset of diamonds available for sale at one of the largest online diamond retailers. The emergent insights contribute to our understanding of the relationship between the consumer search costs and variation in product prices for diamond goods. The results also have broader implications for the effects of online commerce on luxury goods pricing as well as on the potential strategies for retailers to overcome the pricing pressure created by e-commerce.

The paper is structured as follows. First, we provide an overview of prior research on consumer search and product price variation. Next, we review the key diamond physical properties that are known to affect diamond prices. We then discuss the literature on price obfuscation or retailer strategies to increase consumer search costs. After that, we describe the dataset, the methodology and present the data mining insights. We conclude with the discussion of the results, contributions and future research directions.

2 Search Costs and Price Dispersion

The extant research on consumer product information search and price dispersion provides the theoretical foundation for our work. Price dispersion - the variation in price for the same product across different retail channels - has been studied in economics [2], [38]. Price dispersion arises due to the information asymmetry and imperfect consumer information [2]. When consumers are differentially informed, firms can charge consumers different prices [38]. In order to find the price, consumers have to spend resources on search, and the search for product prices can be costly. …

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