Measuring the Frictional Costs of Online Transactions: The Case of a Name-Your-Own-Price Channel

• Authors: Il-Horn Hann;Christian Terwiesch
• Venue: Management Science
• Year: 2003

We study the offers submitted by consumers to a large Name-Your-Own-Price (NYOP) online retailer. A distinctive feature of this retailer is that it allows consumers to repeatedly submit offers on one and the same product. While consumers could identify the threshold price (the minimum price for which the retailer is willing to sell) by incrementing their offer in small steps in each consecutive round, such a strategy would require them to go through many additional online transactions. We define frictional cost as the disutility that the consumer experiences when conducting an online transaction, such as submitting an offer. Thus, in our setting, consumers trade off a direct financial value (lower price) for frictional costs. Based on a consumer choice model capturing this trade-off, we use the observed consumer behavior to reconstruct the frictional cost parameters for the consumers in our sample. We show that, perhaps contrary to the general wisdom, frictional costs in electronic markets are substantial, with median values ranging from EUR 3.54 for a portable digital music player (MP3) to EUR 6.08 for a personal digital assistant (PDA). We find that consumers who have gathered experience with the NYOP channel in previous transactions exhibit lower frictional costs than consumers who use the channel for the first time. Surprisingly, sociodemographic variables do not help to explain the variation in frictional costs.