Shopbots [20, 8],
or comparison shopping agents, offer
an early glimpse of the vast reductions in economic friction that are
likely to occur as the world makes the transition to the information
economy. Over the past few decades, several economists, including
Diamond [7], Wilde and Schwartz [32],
Varian [30], Salop and Stiglitz [25],
Burdett and Judd [3], and Hopkins and
Seymour [14] have studied the question of how
sellers could make any profit at all in a competitive commodities
market, since the traditional Bertrand equilibrium
argument [29] suggests that competitive pressures should
drive prices down to the marginal production cost. They found that the
costliness of discovering prices -- a factor not taken into account
in the traditional Bertrand argument -- could make it rational for
buyers to forego comparing prices.
This in turn allows sellers
to charge more than the marginal production cost.
For example, suppose that you want to purchase Harry Potter and the Sorcerer's Stone. If you were to drive around to two or three local bookstores, it could take at least an hour or two to find and purchase the cheapest copy of the book, and the savings would almost certainly not justify the time and expense of shopping. One could reduce the shopping time to perhaps fifteen minutes by calling bookstores on the phone, and maybe even to five minutes by checking amazon.com, bn.com (the online outlet for Barnes&Noble), and borders.com on the Internet. As of this writing, one would discover that bn.com was just edging out the other two with a price of $8.97 as opposed to $8.98 for each of the other two -- only a penny saved for five minutes of work!
However, suppose that you use the book shopbot at DealPilot.com, one of several such shopbots that have come into existence within the last year or two. Once you specify that you want to shop for Harry Potter and the Sorcerer's Stone, you press the Start Price Comparison button, and within twenty seconds a table of roughly fifty combinations of booksellers and shipping options appears, ordered from least to most expensive. At the top of the list, one finds that shopping.com is offering the book for just $8.47 -- at least half a dollar saved for less than one minute's work, which many would consider worthwhile.
As an increasing number of buyers begin to avail themselves of shopbots, and as shopbots become more pervasive and powerful, one of the frictional forces that has sustained profits for sellers in commodities markets will be reduced substantially. Price-aware buyers will be price-sensitive buyers, and they will force sellers to become extremely responsive in their pricing. We anticipate that humans will not be able to keep up with the demands of responsive pricing on millions of goods and services, and that instead sellers will rely increasingly on what we term pricebots -- agents that adjust prices automatically on the seller's behalf in response to changing market conditions. We can regard Books.com's agent as an early example of a pricebot; it automatically adjusts the price to slightly less than the minimum price offered by Amazon, Barnes and Noble, and Borders.