Prices Keep Falling Faster Online. But for How Long?

We may be near the point where the web advantage stops widening.
Updated on

New price data from Adobe Systems Inc., released today, show that online increased its price advantage vs. offline over the past two years. Logically speaking, though, the gap can’t keep widening forever. And there are some hints in the data that online’s edge is already—well, not going away, but approaching its limit.

Let’s start with the numbers. For the first time this month, Adobe is reporting the price of a full basket of things that are sold online, including apparel, appliances, auto parts, computers, furniture and bedding, groceries, jewelry, medical equipment and supplies, non-prescription drugs, personal care products, pet products, televisions, tools and home improvement items, and toys. According to Adobe, prices of goods in its basket fell about 6 percent from July 2015 through July 2017. In contrast, the same goods tracked by the Bureau of Labor Statistics fell about 3 percent.

“The online-offline gap is widening,” Adobe wrote in a blog post.

True. What’s more, strictly speaking, the BLS data aren’t “offline,” because the government also samples online channels when it collects prices. According to Malik Crawford, a BLS economist, about 8 percent of the price quotes it collects each month are from online sources. What that means is that if the BLS did sample only offline, the gap between its numbers and Adobe’s would have been even bigger.

One reason to think that online can’t keep stretching its advantage over offline is that online retailers will eventually exhaust all possible efficiencies of operating digitally. Even if the online markup for sales, marketing, fulfillment, etc.  fell all the way to zero—which is impossible—online retailers would still have to cover their cost of goods sold, the same as brick-and-mortar retailers do. So they could still retain a price advantage, but it wouldn’t keep growing.

Another reason is that brick-and-mortar retailers, to remain competitive, simply can’t allow and other e-tailers to widen their price advantage beyond the point where it outweighs whatever advantages the physical stores have in personal service and ambiance. The only retailers that stay in business will be those that manage to keep their prices within shooting range of online prices.

In one sector of retailing, the gap between online and offline isn’t expanding at all and may even have gone away. Alberto Cavallo, a professor at the Massachusetts Institute of Technology’s Sloan School of Management, surveyed large, multi-channel retailers and found that the prices they charge online and offline for identical goods were largely the same. The data came from the Billion Prices Project, which he co-founded at MIT. His article, “Are Offline and Online Prices Similar? Evidence from Large Multi-Channel Retailers,” appeared in January in the prestigious American Economic Review.

Cavallo suspects that retailers keep online and offline prices the same to avoid alienating customers, many of whom are skilled comparison shoppers. Doing otherwise “may create complaints,” he says. “Many retailers are introducing these single-price policies.”

Adobe’s own data show that online doesn’t always win. Prices of groceries sold online rose 1 percent in the year through July, while groceries tracked by the BLS rose 0.3 percent in the year through July, Adobe says. But Taylor Schreiner, director of Adobe Digital Insights, says that might be because of big increases in prices of organic products, which are more popular online than offline. 

Schreiner says he expects online prices to fall faster than offline prices “for the foreseeable future.” He quickly adds, “Now, my ‘foreseeable’ isn’t a decade. At least the next several months.”

(Updates second paragraph with more categories of products covered by Adobe index; uses July data for index in ninth paragraph.)

(Updates second paragraph with more categories of products covered by Adobe index; uses July data for index in ninth paragraph.)
    Peter Coy
    Bloomberg Businessweek Columnist
    Peter Coy is the economics editor for Bloomberg Businessweek and covers a wide range of economic issues. He also holds the position of senior writer. Coy joined the magazine in December 1989 as telecommunications editor, then became technology editor in October 1992 and held that position until joining the economics staff. He came to BusinessWeek from the Associated Press in New York, where he had served as a business news writer since 1985.
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