[MUSIC] Hello, dear students. Welcome back to the price module. In previous parts of this module, we introduced the notion of dynamic pricing. In the conventional offline world, prices have been traditionally established by the interaction between the supply and the demand. In physical places defined with the name of marketplaces, where buyers and sellers would meet to bargain. As a result of this negotiation process, some quantities of goods and services would be traded at certain prices. These negotiations will take place every day, in a dynamic way. And, as a result of this process, prices could change quickly, depending on the varying conditions of supply and demand, and depending also on the situation and characteristics of individual buyers. Following this rationale, we also said that the larger the market, the better. Because the larger the number of transactions there is, the more transparent and liquid the market is. And therefore, prices are more representative at the time of reflecting a fair market value. We also discussed the notion that, given that things have different values for different people, prices could also be different for each consumer. Depending on his/her willingness to pay more or less for the same product. Opening the door for what we call differential pricing. Which means simply to charge every consumer a different price depending on his or her characteristics. As a consequence of this, we said that the best theoretic way to reflect the different willingness to pay of each consumer, was by means of an auction. But this mechanism was expensive to organize and to implement. And because of that, auctions were only limited to rare, big-ticket items that could justify the cost and efforts to organize the auction. All that has been said is being radically modified by the eruption and dissemination of the new information technologies. What are the impacts of the Internet on price formation? To begin with, Internet increases the liquidity of the market, increasing not only the number of transactions, but also why the need in transparency in terms of access to information. Now, theoretically speaking, the market base is the work. Transactions are conducted not in a physical space but in a virtual environment. The cyber-space. Opening the door to hundreds of buyers and sellers around the globe. Besides, this market theoretically never closes. Bringing the possibility to buy and sell goods and services around the clock 24/7, 365 days per year. Finally, the acts of buyers and sellers can be then very fast around the very low costs, lowering the Internet barriers to all participants. Because of all these reasons, the Internet has allowed, in many sectors, to reach conditions of almost perfect free market conditions. When I studied economics at university a long time ago in a galaxy far, far away, in the classic view of perfect free market, had to meet certain conditions such as, one, total transparency of information. Two, no enter/exit calls and barriers to participants, buyers and sellers. Three, the product would be or had to be in differentiated commodities. Which means all the products will have to be exactly the same in terms of characteristics. And many professors wwould tell me, this an idealized vision, because such markets rarely exist, however, the Internet has allowed many markets to became very close to almost perfect free competition markets. Why is that? Let's see some of the impacts the Internet is having on price definition. First, we will see the impact on sellers. One, lower cost on transactions. For the seller, the Internet gives them the possibility of offering their products at significantly lower costs in different levels. A, reduction of communication and advertising costs. The possibility to reduce advertising or communication costs brings the possibility to cut prices and still be profitable and at the same time give the chance to enlarge markets. Your market now is the world. I always use a romantic, good example of this, which is the case of Zagier and Urruty, a publisher Ushuaia, the southernmost city in my native country of Argentina, which is a small niche publishing company. It is specialized in books on Patagonia. Since theInternet appeared, they have been able to provide their products in a competitive way to all people all over the world who are interested in their publications. B, lower distribution costs. Internet also offer producers and manufacturers the ability to eliminate or to reduce their distribution costs. The big losers here could be distributors who could beat this intermediary effectively. Allowing customers to buy better products and better prices and simultaneously allowing suppliers to have better margins. The basic example of this was the emergence of dell.com order online that allow Dell to become a big player in the PC business in front of large giants like HP. By offering tailor made personalized products to their customers in shorter periods of time and at a lower prices than those established players like Hewlett Packard. Greater market transparency. The access to information on real time on global basis increases the transparency of the market. These equally important for sellers and buyers, and for sellers, it's important even if they don't make transactions online. For instance, farmers producing grains in Australia, the Argentine Pampas or in the US Midwest. They may decide to sell or not to sell their grains, depending on the evolution of the daily price of cereals in the Chicago study exchange, who can be checked over the web. Estonian fishermen fishing in the Baltic now, they know the prices being paid for their fish were in advance to their arrival to the ports. The information being sent to them by apps on their mobile devices. Three, greater knowledge about customers. At the same time, the Internet linked to segmentation tools and fast and economic data bases, allow companies to segment their offers. Personalizing offers for different customers based on the customer profile. The Internet provides an excellent opportunity to apply differential pricing. To charge different prices to different people based on their history, habits, traits, tastes, etc. But also to do it dynamically. The price may change over time even for the same person. A good example of this is when buying airline tickets over the net. A consumer can use the Internet as to look for several offers for a certain air ticket. If he or she gets the best but does not buy the ticket on the spot, chances are that if the consumer comes after sometime prices might have increased a little bit. Because some platforms that can identify the individual consumers, learn and after detecting that the same person is willing to buy a certain ticket, the price automatically increases. On the other side, companies can use accesses to large data bases to reward loyal consumers at the time of the developing potential loyalty programs. Four, ability to change prices dynamically. According to changes in the bank, supplies and costs. The Internet gives the sellers the possibility to modify their prices, not only on an individual basis but also to modify the total catalog prices if market conditions change. If a major weather event affects certain crops or if conflicts or wars affect the availability of certain raw materials, producers may alter their price list in a very short period of time across the board. For buyers, the Internet also has impacts on the time of the defining prices. The biggest advantage is related to having real time access to information worldwide, which helps to bring higher market transparency and therefore higher ability to compare prices and look for the best possible deals. Even in the case of guideline prices or fixed prices, there are a lot of tools that give information on exchange rates such as on dell.com or interest rates, mortgage rates, etc. The Internet is also affecting their way which auctions are conducted both of the B2C as well as in the B2B world. In the B2C arena because of lower transaction costs, companies like eBay have been able to offer auctions on a massive basis, opening new entire world. Allowing consumers to put not-so-commodity, secondhand articles or low ticket articles on auctions. That was a privilege reserved not until long ago only for expensive items like antiques or art masterpieces. And a more silent, but very important revolution has been taking place over the last two decades. In the transaction of B2B goods and services with the emergence and consolidation of online auction tools, that help allow to cut purchase costs of certain items in a very significant way to large corporations. And this is all for the moment. I look forward to meeting you in our next part of the price module. Thank you very much. See you soon. Bye bye. [MUSIC]
