Internet Shopping Agents: Virtual Co-Location and Competition

Internet Shopping Agents (ISAs) allow consumers to constlessly search many online retailers and buy as the lowest price. One would expect these ISAs to subject sellers to intense price competition that results in uniform low prices. Yet, Internet retailers have joined these ISAs. Furthermore, the prices charged by inside retailers can vary substantially. We examine the impact of ISAs on market competition. An ISA due to mass of consumers that they can potentially win, while others stay our and extract surplus from their loyal consumers. The equilibrium inside pricing is such that the average price charnged can increase or decrease when more retailers join, depending on whether or not the reach of the ISA is independent of the number of joining retailers. When the reach is endogenous, there exists a unique number of inside retailers.