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Persistent Price Dispersion in Online Markets

Author

Listed:
  • Michael R. Baye

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

  • John Morgan

    (Haas School of Business and Department of Economics, University of California, Berkeley)

  • Patrick Scholten

    (Bentley College)

Abstract
Using data from one of the Internet’s leading price comparison sites for consumer electronics products, we present evidence for the persistence of price dispersion for 36 homogeneous products. The markets for these products are “thick” with an average of over 20 firms selling each product. We show that prices do not converge to the “law of one price” even after an 18 month period. This finding is robust to controls for differences in shipping charges and inventories. Further, we show that product life cycle effects lead to changes in the number of competing firms and the range of price dispersion consistent with the theoretical predictions of the Varian (1980) model. The average number of competing firms declines from about 28 to 10 during the final five months of our dataset. Over this same period, the average range in prices decreases from about 75 percent to 30 percent. After accounting for firm heterogeneities in costs, branding, reputation, trust, product availability and shipping costs, 28 percent of the variation in prices charged for homogeneous products remains unexplained. This is also consistent with the Varian model.

Suggested Citation

  • Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Persistent Price Dispersion in Online Markets," Working Papers 2006-12, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    • Handle: RePEc:iuk:wpaper:2006-12
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    References listed on IDEAS

    as
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    Cited by:

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    2. Barnes Juan Diego, 2023. "Dispersión de Precios y Dinámicas Intradistribución en Ambientes de Alta Inflación: Un Análisis Empírico," Asociación Argentina de Economía Política: Working Papers 4625, Asociación Argentina de Economía Política.
    3. Timothy J. Richards & Gordon J. Klein & Celine Bonnet & Zohra Bouamra-Mechemache, 2020. "Strategic Obfuscation and Retail Pricing," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(4), pages 859-889, December.
    4. Xin (Shane) Wang & Feng Mai & Roger H. L. Chiang, 2014. "Database Submission ---Market Dynamics and User-Generated Content About Tablet Computers," Marketing Science, INFORMS, vol. 33(3), pages 449-458, May.
    5. Arnold Michael A. & Pénard Thierry, 2007. "Bargaining and Fixed Price Offers: How Online Intermediaries are Changing New Car Transactions," Review of Network Economics, De Gruyter, vol. 6(2), pages 1-27, June.
    6. Hämäläinen, Saara, 2022. "Multiproduct search obfuscation," International Journal of Industrial Organization, Elsevier, vol. 85(C).
    7. Zhenlin Yang & Lydia Gan & Fang-Fang Tang, 2007. "A Study of Pricing Evolution in the Online Toy Market," Economic Growth Centre Working Paper Series 0704, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    8. Esteves, Rosa-Branca, 2010. "Pricing with customer recognition," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 669-681, November.
    9. Brynjolfsson, Erik & Dick, Astrid Andrea & Smith, Michael D., 2004. "Search and Product Differentiation at an Internet Shopbot," Working papers 4441-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    10. Hämäläinen, Saara, 2018. "Competitive search obfuscation," Journal of Economic Dynamics and Control, Elsevier, vol. 97(C), pages 38-63.
    11. Michael A. Arnold & Christine Saliba, 2003. "Price Dispersion in Online Markets: The Case of College Textbooks," Working Papers 03-02, University of Delaware, Department of Economics.
    12. Gerard J. Berg, 2006. "Revolutionary Effects of New Information Technologies," Economic Journal, Royal Economic Society, vol. 116(509), pages 10-28, February.
    13. Erik Brynjolfsson & Astrid Dick & Michael Smith, 2010. "A nearly perfect market?," Quantitative Marketing and Economics (QME), Springer, vol. 8(1), pages 1-33, March.
    14. Michelle Haynes & Steve Thompson, 2013. "Entry and Exit Behavior in the Absence of Sunk Costs: Evidence from a Price Comparison Site," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 42(1), pages 1-23, February.
    15. Claudio A. Piga & Enrico Bachis, 2006. "Pricing strategies by European traditional and low cost airlines. Or, when is it the best time to book on line?," Discussion Paper Series 2006_14, Department of Economics, Loughborough University, revised Jul 2006.
    16. Ramnath K. Chellappa & Raymond G. Sin & S. Siddarth, 2011. "Price Formats as a Source of Price Dispersion: A Study of Online and Offline Prices in the Domestic U.S. Airline Markets," Information Systems Research, INFORMS, vol. 22(1), pages 83-98, March.
    17. Tim Rathjen, 2011. "Do Time Poor Individuals Pay More?," FFB-Discussionpaper 91, Research Institute on Professions (Forschungsinstitut Freie Berufe (FFB)), LEUPHANA University Lüneburg.
    18. Sulin Ba & Jan Stallaert & Zhongju Zhang, 2012. "Research Note ---Online Price Dispersion: A Game-Theoretic Perspective and Empirical Evidence," Information Systems Research, INFORMS, vol. 23(2), pages 575-592, June.
    19. Bhavik K. Pathak, 2016. "Emerging online educational models and the transformation of traditional universities," Electronic Markets, Springer;IIM University of St. Gallen, vol. 26(4), pages 315-321, November.

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    More about this item

    Keywords

    Price dispersion; Internet; Law of One Price;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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