A Multi-Level Theory Approach to Understanding Price Rigidity in Internet Retailing

Abstract

Price rigidity involves prices that do not change with the regularity predicted by standard economic theory, and is of long-standing interest to firms and industries, and our understanding of the economy as a whole. The previous IS literature has failed to identify the central role of IT and Internet retailing-related technologies to explain the rigidity of prices on the Internet. Instead, it has offered only limited explanations, such as menu costs and tacit collusion. These ideas, and quite a few other key theoretical perspectives were formulated in disciplines other than ours. Thus, the issue of price rigidity and price adjustment in Internet retailing should be given more scrutiny than the literature has provided to date. We review and synthesize what we know about price rigidity in non-electronic retailing contexts using a multi-level theory approach that identifies three unique levels of analysis: the firm-specific level, the firm-to-consumer level, and the firm-to-market level. We evaluate to what extent this knowledge is applicable to explain price-setting and price adjustment on the Internet. We conclude that there should not be less price rigidity in Internet retailing than in traditional retailing – even though the Internet is involved. To this end, we recommend a multi-level variance theory of Internet-based price rigidity. This study provides a foundation for the development of new theoretical perspectives at the crossroads of the academic disciplines of marketing, economics and IS. It encourages research that is able to probe for a deeper understanding of new economic phenomena associated with the digital economy’s growth.

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