The Internet and Consumer Choice
Buying goods and services is at once simpler and more demanding in the digital age. A few years ago, the act of buying something usually meant going to a store and seeing whether what you wanted was available or whether a close substitute would suffice. Perhaps a customer came to the store armed with information – maybe with a consumer magazine in hand, or with an advertisement in mind, or with a friend in tow. Lacking these, a customer might rely on a salesperson to get through a transaction.
Today, the process of buying something – research, comparison shopping, and executing the transaction – can take place easily at home using the internet. Notwithstanding the convenience of this, online shopping can also create new information demands on consumers. Amazon.com recommended an artist I might like when I last bought music online, but should I take that at face value? Who or what should I consult to verify that recommendation? Where is the right place for information on cell phones and which cell phone plan is right for me? For some people, the proliferating number of choices may be daunting.1
Networked information gives consumers ready access to resources that can provide clues about product quality, terms of service, and other features. This report examines the process by which people come to purchase three types of products that, in different ways, are likely to be influenced by online information.
Three products in the digital economy
Music is an experience good, that is, one whose quality is difficult to determine before the purchase.2 This means that a consumer faces an inherent uncertainty about its true value in advance of buying it. Since the judgment on quality comes after purchase, the buying decision relies heavily on information – advertising, word-of-mouth, or sampling. The music industry has traditionally combined sampling and bundling of its products to draw users to music without giving away the goods. Listeners could assess the quality of music for free by listening to songs on the radio, but, after the demise of the single 45rpm record (in which the consumer still paid for the obscure B-side), they had to buy a collection of songs. Buyers hoped the quality of the collection matched that of the song or songs they had sampled.
This model relied a great deal on intermediaries, such as record companies and radio stations, to bridge the gap between musician and consumer. These intermediaries served as quality filters that reduced the uncertainty over whether a musical offering was consistent with consumers’ tastes and thus worth purchasing.
This model has been under challenge in the past several years in the music industry. Consumers can sample a wide variety of songs repeatedly and at their leisure by streaming them to computers. They can also learn about music from musicians themselves or other fans. Music lovers can purchase as few or as many songs as they like, perhaps directly from the artists. Intermediaries are a much less necessary part of the bargain.
Another dimension to music in the digital age is how people consume it. Music, by tradition, is often enjoyed communally, which influences how people assess whether it is any good or not. Alexander Graham Bell was the first to see that communication technology might change the communal nature of listening to music, as he thought the telephone would be used to let people gather to listen to concerts happening in other places. The internet turns Bell’s vision on its head – people can listen to music wherever they want, on a variety of devices, and virtually gather in cyberspace to talk about it.
The deep reach of digital technology into music production and consumption means one would expect the internet to have impacts all along the way in people’s purchasing patterns:
- For pre-purchase research, online sampling should be pervasive and influential as users try to assess whether buying music suits their tastes.
- Post-purchase online chatter is also likely to be significant, as consumers check in with others about the quality of the music and to share in the enjoyment of it.
The cell phone is a type of information good whose value is dependent on the information embedded in it or facilitated by it, and which depends on a network to realize its full value.3 As an information good, the cell phone shares some characteristics of an experience good, in that some of its features may be sampled ahead of time, but the device’s value becomes clear once the consumer has begun to use it. The fact that the cell phone gives access to a networked service adds another layer of consumer uncertainty. These include how many others are connected to the network (a determinant of a network’s value) and how well the network functions technically in connecting users to one another. Neither is easy to determine with confidence before purchase.
These two layers of consumer uncertainty give users strong incentives to switch if either the cell phone device or service is not up to par. As a consequence, sellers of cell phones and services use a variety of strategies to lock customers into the product. Cell phones and their service plans typically come with strings attached, such as early termination fees, which make it costly to switch service. The devices themselves, in the United States at least, usually cannot be used on other providers’ networks because of technical modifications made by the manufacturer at the behest of the service provider.
Another consequence of the cell phone and related services is product differentiation. If carriers worry about people fleeing their service, they will take steps to distinguish their products from others to raise the cost of switching. Thus, carriers will have different service plans and prices, and will tout the virtue of their networks as opposed to those of other carriers.
These seller strategies, all designed to make it costly for people to switch services, give consumers strong incentives to gather a lot of information prior to purchase. It is also likely that consumers will think that this research pays off in better deals on the kinds of phones they purchase – and it may well. Consumers with an internet connection would be expected to heavily rely on online resources for purchasing decisions for a cell phone.
Exploring the process of buying a home or renting an apartment offers the opportunity to explore a product less embedded in digital culture than the others. Real estate is a classic search good in which the quality of the good can be easily discerned before the purchase is made – in other words, the opposite of an experience good.4 Any product whose rallying cry is “location, location, location” is a fairly open book when it comes to its characteristics.
This places a large informational burden on the buyer to sort through a range of attributes. With the internet offering the opportunity of remote inspection of properties, one would expect the internet to help reduce search costs by eliminating places that otherwise would require physical inspection. Therefore, one would expect that real estate buyers would rely heavily upon online information and, possibly, use it to substitute for traditional means of finding out about a place to live, such as a newspaper or a real estate agent. Not unlike music purchasing, renters or buyers of real estate might use online resources as a substitute for traditional intermediaries in the transaction.
The September 2007 survey asked respondents whether they had, in the previous year, made one of the following purchases:
- Music: 53% of respondents said they had purchased music in the prior year.
- A cell phone: 39% of respondents said they had gotten a new cell phone last year.
- A place to live: 17% of respondents said they moved to a new house, apartment, or condominium in the prior year, some of these buying and others renting.
In order to have an appropriate distribution of respondents in each module, not all respondents who reported doing a transaction in the previous year were directed to questions on the topic. As a result, the number of respondents receiving questions on each topic unfolded as follows:
- 26% of the sample, or 638 respondents, received questions about a music purchase.
- 26% of the sample, or 630 respondents, received questions about a cell phone purchase.
- 16% of the sample, or 314 respondents, received questions about how they went about finding a place to live.
The modules asked detailed questions about the resources – offline and online – that respondents consulted in making buying choices and the way they eventually made the purchase. The questions also inquired about the online resources they may use after the purchase to learn more about what they bought. Some 31% of the sample did not receive questions on one of the three topical modules since that portion of the sample said they had done none of the three transactions in the previous year.
- numoffset=”6″ See Barry Schwartz, The Paradox of Choice. New York: Harper Collins, 2005, who argues that many everyday decisions have become complex in the face of the abundance of choices we face. ↩
- Carl Shapiro and Hal Varian, Information Rules. Boston: Harvard Business School Press, 1999. p. 5. ↩
- “Information Good.” From Wikipedia at http://en.wikipedia.org/wiki/Information_good. Accessed on March 28, 2008. Other examples of information goods include computer software and DVD players, whose values are tied to their ability to process information and the network of other users who have adopted it. ↩
- Philip Nelson, “Information and Consumer Behavior”, 78 Journal of Political Economy 311, 312 (1970). Other examples of search goods listed by Nelson include sporting goods, furniture, and garden implements. ↩