The Impact of Electronic Commerce on Competition in the Retail Brokerage Industry

Posted: 15 Nov 2004

See all articles by Yannis Bakos

Yannis Bakos

New York University (NYU) - Department of Information, Operations, and Management Sciences

Henry C. Lucas

University of Maryland - Robert H. Smith School of Business

Wonseok Oh

McGill University - Desautels Faculty of Management

Gary Simon

New York University (NYU) - Department of Information, Operations, and Management Sciences

Siva Viswanathan

University of Maryland - Robert H. Smith School of Business

Bruce Weber

London Business School

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.

Keywords: E-commerce, information asymmetry, unbundling, impact of IT

JEL Classification: A10, C72, C93, G24, L15, O33

Suggested Citation

Bakos, Yannis and Lucas, Henry C. and Oh, Wonseok and Simon, Gary and Viswanathan, Siva and Weber, Bruce, The Impact of Electronic Commerce on Competition in the Retail Brokerage Industry. Available at SSRN: https://ssrn.com/abstract=618444

Yannis Bakos

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States
212-998-0841 (Phone)

HOME PAGE: http://www.stern.nyu.edu/~bakos

Henry C. Lucas

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Wonseok Oh

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Gary Simon

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States

Siva Viswanathan (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Bruce Weber

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

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