Mini-project 1

Are Prices Lower on the Internet?

Due: 9/10/14 (Section D), 9/11/14 (Sections A, B, and C)


In the past decade, we have observed a huge shift in consumer shopping patterns from
traditional bricks and mortar retail outlets to the Internet, as typified by the dramatic
success of Amazon.com and other online sales sites, as well as the failure of retailers
(such as Borders Books) who failed to adapt sufficiently to these trends. Many have
argued that Internet shopping is not only more convenient for consumers, but also offers
them lower prices. The argument for lower prices is as follows: because users can easily
check prices at alternative outlets, Internet retailers will be under more pressure than their
counterpart retailers selling from physical locations to match the prices of their competitors.
So-called shopbots reinforce such price competition. Shopbots search the Internet for the
availability and price of a specific product (e.g., John Grishams latest bestseller) and then
provide the user with a listing of alternative Internet outlets selling the desired product and
the price charged at that outlet. A related hypothesis is that prices on the Internet will not
only be lower but less variable. This lower variance hypothesis also follows from the
competition argument. As Internet retailers compete to match their competitors prices, this
will also tend to reduce the variability of prices across Internet outlets.

To test the lower price, lower variability, and related hypotheses, your first mini-project
will involve the analysis of a data set (SMITH_BOOKS_FALL_2014.MTW) assembled by
Heinz School faculty member Mike Smith and a collaborator from MIT. The dataset is
comprised of the selling price and other information for a selected sample of book titles
(e.g. The Perfect Storm) and can be downloaded from Blackboard. Prices for these books
were assembled from major Internet retailers such as Amazon and from major physical
("bricks and mortar") retailers such as Barnes and Noble. (Note that the data set
distinguishes the Internet and physical outlets of organizations such as Barnes and Noble
that have both types of operations.) In total there are 800 records in the data set that you
will be analyzing. Each record is comprised of the following variables:

Variable Description

retid retailer identification number (see table)
Internet 1 if Internet retailer, 0 if physical retailer
title id title identification number (see table)
popular 1 if bestseller, 0 if not bestseller
hardcover 1 if hardcover book, 0 if paperback
fiction 1 if fiction, 0 if non-fiction
listpr publishers suggested retail price
storepr selling price of the book at that outlet

Because the data set is comprised of prices for a sample of book titles, each with a
different list price, you should create a standardized price equal to 100*(storepr/listpr) for
purposes of comparison. If the standardized price equals 100, the store price is 100% of
the list price. If it equals 90%, this implies it is selling at a 10% discount. If it equals 107, this
implies that it is selling for 7% more than the producers suggested list price. Use this
standardized measure of price to examine what these data suggest about the following
questions:

1) Do (standardized) prices at Internet outlets tend to be lower than at physical outlets?
By how much? Are Internet prices less variable? By how much? The standard
deviation and interquartile range are two useful summary statistics for discussing
variability in a concrete and understandable way. Please consider both of these
measures in your analysis, and also create a histogram comparing the distributions of
physical and Internet prices.

2) Does the difference in price between Internet and physical outlets seem to depend on
the publisher list price of the book? To perform this analysis, compare prices for
Internet and physical outlets for two distinct sub-samples: the sample of books with list
prices greater than or equal to the sample median, and the sample with list prices
below the median. If you find that the difference in discount depends on price,
speculate on why this might happen.

3) How does whether a book is in hardcover or paperback affect the difference in price
between Internet and physical outlets? Speculate on why this might be the case.

4) How does whether a book is a best-seller affect the difference in price between Internet
and physical outlets? Speculate on why this might be the case.

5) At the time when this data was collected, the three largest Internet book retailers were
Amazon, Borders (Internet), and Barnes & Noble (Internet). Some have suggested that
these Big Three book retailers had sufficient market power and prestige that they
could sell at higher prices than their other Internet rivals. Do the data support this
contention?

6) The sample includes two major "hybrids" that had both physical locations and Internet
locations, Barnes & Noble and Borders. One strategy for maximizing profits is to price
discriminate across outlet types based on consumers price sensitivity. Does each of
these two retailers differently price between their Internet and physical outlets? Do your
results give any hints as to why Borders might have gone bankrupt? Briefly, describe
your findings and their implications.

Your response should be in the form of a brief 2-3 page discussion of your hypotheses and
your findings. Attach any relevant Minitab output in support of your conclusions.
Retid (Retailer identification code)

1 Amazon.com (Books)
2 Books.com
3 Altbookstore
4 BooksNow
5 COOP
6 B. Dalton
7 Crown
8 Waterstones
9 Barnes & Noble (Internet)
10 Cody's (Internet)
11 Powell's (Internet)
12 Wordsworth (Internet)
13 Barnes & Noble (Physical)
14 Cody's (Physical)
15 Powell's (Physical)
16 Wordsworth (Physical)
17 Borders (Internet)
18 Borders (Physical)
19 Spree.com
20 Buy.com
TitleID Title Author

101 The Partner John Grisham
102 Hornet's Nest Patricia Cornwell
103 Cold Mountain Charles Frazier
104 The Winner David Baldacci
105 John Cameron's Titanic Ed W. Marsh
106 Under the Tucson Sun Frances Mayes
107 Midnight in the Garden of Good and Evil John Berendt
108 Angela's Ashes Frank McCourt
109 Don't Sweat the Small StuffAnd It's All Small Stuff Richard Carlson
110 Simple Abundance Sarah Ban Breathbach
111 The Street Lawyer John Grisham
112 Here on Earth Alice Hoffman
113 The 9 Steps to Financial Freedom Suze Orman
114 Tuesdays with Morrie Mitch Albom
115 The Perfect Storm Sebastian Junger
116 Divine Secrets of the Ya-Ya Sisterhood Rebecca Wells
117 What Looks Like Crazy on Any Ordinary Day Pearl Cleage
118 Bag of Bones Stephen King
119 The Loop Nicholas Evans
120 A Man in Full Tom Wolfe
121 For the Love of the Game Michael Jordan
122 Something More: Excavating Your Authentic Self Sarah Ban Breathnach
123 The Ghost Danielle Steel
125 The Greatest Generation Tom Brokaw
126 The Street Lawyer John Grisham
127 Southern Cross Patricia Cornwell
128 Dr. Atkins New Diet Revolution Richard C. Atkins
129 How to get what you want and want what you have John Gray
130 The Courage to be Rich Suze Orman
131 The Testament John Grisham
132 Vittorio, the Vampire Anne Rice
201 Travels Along the Edge David Noland
202 12 Lessons on Life I Learned from My Garden Vivian Elisabeth Glyck
203 The Pill Book Guide to over the Counter Medications Robert P. Rapp
204 It's Obvious You Won't Survive by your Wits Alone Scott Adams
205 No Fat Chicks Terry Poulton
206 A Superior Death Navada Barr
207 Gump & Co. Winston Groom
208 Our Sacred Honor William J. Bennett
209 The People's Choice Jeff Greenfield
210 The Center David Shobin
211 White Butterfly Walter Mosley
212 Season for Miracles Marilyn Pappano
213 Moon Music: A Novel Faye Kellerman
214 Half Asleep in Frog Pajamas Tom Robbins
215 Why Americans Hate Politics E.J. Dionne, Jr.
216 Israel's Secret Wars Ian Black, Benny Morris
217 Lincoln's Men William C. Davis