The Impact of E-Commerce on Competition in the Retail Brokerage Industry

  • Authors:

  • Yannis Bakos;Henry C. Lucas;Wonseok Oh;Gary Simon;Siva Viswanathan;Bruce W. Weber

  • Affiliations:

  • Leonard N. Stern School of Business, New York University, 44 West 4th Street, Room 8-83, New York, New York 10012-1126;Robert H. Smith School of Business, 4337 Van Munching Hall, University of Maryland, College Park, Maryland 20742-1815;Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montreal, Quebec, H3A 1G5 Canada;Leonard N. Stern School of Business, New York University, 44 West 4th Street, New York, New York 10012-1126;Robert H. Smith School of Business, 4313 Van Munching Hall, University of Maryland, College Park, Maryland 20742-1815;London Business School, Regent's Park, London, NW1 4SA United Kingdom

  • Venue:
  • Information Systems Research
  • Year:
  • 2005

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Abstract

This paper analyzes the impact of e-commerce on markets where established firms face competition from Internet-based entrants with focused offerings. In particular, we study the retail brokerage sector where the growth of online brokerages and the availability of alternate sources of information and research services have challenged the dominance of traditional brokerages. We develop a stylized game-theoretic model to analyze the impact of competition between an incumbent full-service brokerage firm with a bundled offering of research services and trade execution and an online entrant offering just trade execution. We find that as consumers' willingness to pay for research declines, the incumbent finds it optimal to unbundle its offering when competing with the online entrant. We also find that the online entrant chooses a lower quality of trade execution when faced with direct competition from the incumbent's unbundled offering. The analytical model motivates a unique field experiment placing actual simultaneous trades with traditional full-service and online brokers, to compare order handling practices and the quality of trade execution. In keeping with our analytical results, our empirical findings show a significant difference in the quality of execution between online brokerages and their full-service counterparts. We discuss the relevance of our findings for quality differentiation, price convergence, and profit decline in a variety of markets where traditional incumbents are faced with changes in the competitive landscape as a result of e-commerce.