Abstract
Contrary to the traditional economic prediction that prices decrease as more firms enter the market, this paper finds a non-monotonic relationship between the number of firms and prices in online book markets. A substantial decrease in posted prices is observed when the market moves from a monopoly to duopoly. Surprisingly, as the market further expands, posted prices converge to monopoly price rather than competitive price. This is because as the number of sellers increase on the internet, the cost for consumers to obtain accurate information as well as the cost to evaluate products and sellers increase. Thus, the existence of a large number of sellers deter consumer search and lead to more random purchases. With little consumer search, sellers’ returns to undercutting price reduce. Therefore, instead of lowering price when faced with more competitors, sellers increase prices.