Application of Marshallian economics as an online shopping strategy

Online shopping facilitates buying and selling of products and services beyond the geographical periphery. The array of interdependence and parameters that emerge from coalescence among consumer purchasing behaviour, economics and human behaviour lead to the emergence of the Marshallian economics model. The advantage of this model is that it provides an idea of a marketplace consumer behaviour (Omotoyinbo et al., 2017).

Based on the model, it was found that online purchase behaviour is dominated by specific factors like:

• the inclination towards offers along with the flexibility of payment methods,
• diversity of products,
• privacy,
• security,
• ease of shopping and,
• convenience (Delafrooz et al., 2010).

A multitude of factors influences customer purchase intentions. So marketers use methods and strategies of Marshallian economic model to ensure customer engagement (Choudhury and Dey, 2014).

Understanding Marshallian economics

The Marshallian economics was forwarded by the eminent economist Alfred Marshall who proposed that the marginal utility of money is constant. This means customers prefer buying specific products or services exclusively based on the level of personal satisfaction (Biswas, 2012). The basic feature of the Marshallian Economic model is that it emphasizes that customers are rational beings with their purchase behaviour. Consumer choice is an important parameter that determines the effectiveness of an e-retailing company. In such a scenario, Marshallian economics proves helpful in understanding what factors determine their online purchase behaviour at a given point of time.

DD1= Demand curve for commodity
OP= price
OQ= unit of commodity that are purchased
OP x OQ = area 
OQRP = price paid
OQRD = total amount of money customer is prepared to pay for buying OQ units
OQRD – OQRP = DRP = customer’s surplus. 

According to the model, when the price of the commodity falls to OP1, the consumer’s surplus increases to DR1P1 and conversely a rise in price would diminish it.

Components of Marshallian economy

The Marshallian theory is based on three aspects (Omotoyinbo et al., 2017) ;

1. price
2. buying behaviour and
3. economic gain

These components emerge from the perspectives that;

• If the price of a product is lower, the consumers will buy it.
• When the price of the product is lower than the income of the consumers, it will also inspire them to buy it.
• If the product price is higher than a substitute then customers will show more preference for buying the substitute.

Thus, as per the Marshallian theory when the expenditure level of a customer remains affected by price changes, the marginal utility remains unaltered. While the rate of expenditure incurred by a customer may exceed over a given period of time due to excitement or increased buying, customers learn to control expenses beyond thier capability (Biswas, 2012).

Using Marshallian economics

Amazon uses an ‘algorithmic pricing strategy’ that replaces the purchase-related decision-making process in a manner that it automatically sets the price of products based on their buying behaviour (Chen et al., 2016). It combines all three components price, customer and economics. Thus, different online customers are presented with different products at different prices as per their purchasing behaviour. This algorithmic pricing strategy is immensely beneficial for the seller too in the manner that they are able to understand the competitor’s price.

Further, the seller is able to detect potential buyers and then change prices automatically to maximize profit. This option gives the customers the scope of finding out how many sellers in a specific region are selling the same product at different prices. As an added feature, Amazon relegates sellers who are not featured in a separate webpage (Chen et al., 2016).

Implications of the Amazon strategy

The algorithmic pricing model of Amazon focuses primarily upon the Marshallian component of ‘pricing’ to appeal to the requirements of its customers. The second component, which is ‘buyer behaviour’ is precisely tracked by Amazon in order to correspond price choices to customers based on their previous purchase behaviour. The third and vital component ‘economic gain’ allows customers to get the chance to select the most competitive pricing.

Based on the concepts of Marshallian Economics, which is customers buy products from selection criteria, also applies here. Range of seller options and corresponding product prices helps buyers to reach purchase decisions. The eventual repercussion of this algorithmic pricing strategy of Amazon is that 82% of its sales come from its Buy Box option (Chen et al., 2016).

References

• Biswas, T., 2012. The Marshallian Consumer. Review of Economic Analysis 4, 165–174.
• Chen, L., Mislove, A., Wilson, C., 2016. An Empirical Analysis of Algorithmic Pricing on Amazon Marketplace, in: Proceedings of the 25th International Conference on World Wide Web. Presented at the International World Wide Web Conferences Steering Committee.
• Choudhury, D., Dey, A., 2014. Online Shopping Attitude among the Youth: A study on University Students. International Journal of Entrepreneurship and Development Studies (IJEDS) 2.
• Delafrooz, N., Paim, L.H., Khatibi, A., 2010. Students’ Online Shopping Behavior: An Empirical Study. Journal of American Science 6, 137–147.
• Omotoyinbo, C., Worlu, R., Ogunnaike, O., 2017. CONSUMER BEHAVIOUR MODELLING: A MYTH OR HEURISTIC DEVICE? Perspectives of Innovations, Economics & Business 17.