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An Analysis of Pricing Strategy and Price Dispersion on the Internet

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  • Randy A. Nelson

    ()
    (Colby College)

  • Richard Cohen

    (Buckingham Properties)

  • Frederik Roy Rasmussen

    (Harvard Business School)

Abstract

Using prices obtained from shopbots, we test several hypotheses regarding the economics of information and optimal search. We find that price dispersion is positively (negatively) related to product price and the number of sellers in cross-sectional (time series) analysis. Price dispersion increases over time when the sample includes new entrants, but decreases in the absence of entry. Controlling for shipping charges and seller heterogeneity reduces, but does not eliminate, price dispersion. Finally, prices appear to be correlated across products and over time – low price sellers for one product (time period) generally charge low prices for all items (time periods).

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File URL: http://college.holycross.edu/RePEc/eej/Archive/Volume33/V33N1P95_110.pdf
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Bibliographic Info

Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 33 (2007)
Issue (Month): 1 (Winter)
Pages: 95-110

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Handle: RePEc:eej:eeconj:v:33:y:2007:i:1:p:95-110

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Postal: c/o Dr. Alexandre Olbrecht, The Anisfield School of Business 205, Ramapo College, 505 Ramapo Valley Road, Ramapo, New Jersey 07430, USA
Phone: (201) 684-7346
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Web page: http://www.ramapo.edu/eea/journal.html
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  1. Karen Clay & Ramayya Krishnan & Eric Wolff, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," NBER Working Papers 8271, National Bureau of Economic Research, Inc.
  2. Brown, Jeffrey, 2000. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp00-007, Harvard University, John F. Kennedy School of Government.
  3. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 700-712, September.
  4. Erik Brynjolfsson & Michael D. Smith, 2000. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Management Science, INFORMS, INFORMS, vol. 46(4), pages 563-585, April.
  5. Dennis W. Carlton & Judith A. Chevalier, 2001. "Free Riding and Sales Strategies for the Internet," NBER Chapters, National Bureau of Economic Research, Inc, in: E-commerce, pages 441-461 National Bureau of Economic Research, Inc.
  6. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(4), pages 833-862, August.
  7. Clay, Karen, et al, 2002. "Retail Strategies on the Web: Price and Non-price Competition in the Online Book Industry," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 50(3), pages 351-67, September.
  8. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(2), pages 418-38, April.
  9. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, American Economic Association, vol. 91(3), pages 454-474, June.
  10. Dana, J.D., 1991. "Learning in an Equilibrium Search Model," Papers, Stanford - Institute for Thoretical Economics 37, Stanford - Institute for Thoretical Economics.
  11. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 480-93, June.
  12. Friberg, Richard & Ganslandt, Mattias & Sandström, Mikael, 2000. "E-commerce and prices - theory and evidence," Working Paper Series in Economics and Finance, Stockholm School of Economics 389, Stockholm School of Economics, revised 08 Sep 2000.
  13. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 817-38, May.
  14. Pratt, John W & Wise, David A & Zeckhauser, Richard, 1979. "Price Differences in Almost Competitive Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(2), pages 189-211, May.
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Cited by:
  1. Lesley Chiou & Jennifer Pate, 2010. "Internet Auctions and Frictionless Commerce: Evidence from the Retail Gift Card Market," Review of Industrial Organization, Springer, Springer, vol. 36(3), pages 295-304, May.
  2. Jiří Sedláček, 2013. "Price Dispersion on the Internet: Empirical Comparison of Several Commodities from the Czech Republic," Central European Business Review, University of Economics, Prague, University of Economics, Prague, vol. 2013(1), pages 35-42.

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