The impact of e-commerce on competition in the retail brokerage industry

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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.
Publisher
INST OPERATIONS RESEARCH MANAGEMENT SCIENCES
Issue Date
2005-12
Language
English
Article Type
Article
Keywords

PRICE-COMPETITION; SECURITIES; INTERNET; PRODUCT

Citation

INFORMATION SYSTEMS RESEARCH, v.16, no.4, pp.352 - 371

ISSN
1047-7047
DOI
10.1287/isre.1050.0064
URI
http://hdl.handle.net/10203/93224
Appears in Collection
MT-Journal Papers(저널논문)
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