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Prices and Price Dispersion on the Web: Evidence from the Online Book Industry

In: E-commerce

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  • Karen Clay
  • Ramayya Krishnan
  • Eric Wolff

Abstract

Using data collected between August 1999 and January 2000 covering 399 books, including New York Times bestsellers, computer bestsellers, and random books, we examine pricing by thirty-two online bookstores. One common prediction is that the reduction in search costs on the Internet relative to the physical channel would cause both price and price dispersion to fall. Over the sample period, we find no change in either price or price dispersion. Another prediction of the search literature is that the prices and price dispersion of advertised items or items that are purchased repeatedly will be lower than for unadvertised or infrequently purchased items. Prices across categories of books appear to conform to this prediction, with New York Times bestsellers having the lowest prices as a fraction of the publisher's suggested price and random books having the highest prices. Interestingly, price dispersion does not conform with this prediction, apparently for reasons related to stores' decisions to carry particular books. One reason why we may not observe convergence in prices is because stores have succeeded in differentiating themselves even though they are selling a commodity product. We observe differentiation (or attempted differentiation) by a significant number of firms.

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This chapter was published in:

  • Severin Borenstein & Garth Saloner, 2001. "E-commerce," NBER Books, National Bureau of Economic Research, Inc, number bore01-1, Ekim.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12318.

    Handle: RePEc:nbr:nberch:12318

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    References

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    1. Benabou, Roland, 1988. "Search market equilibrium bilateral heterogeneity and repeat purchases," CEPREMAP Working Papers (Couverture Orange) 8806, CEPREMAP.
    2. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
    3. Jeffrey Milyo & Joel Waldfogel, 1998. "The Effect of Price Advertising and Prices: Evidence in the Wake of 44 Liquormart," NBER Working Papers 6488, National Bureau of Economic Research, Inc.
    4. Wilde, Louis L & Schwartz, Alan, 1979. "Equilibrium Comparison Shopping," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 46(3), pages 543-53, July.
    5. Arnold, Michael A, 2000. "Costly Search, Capacity Constraints, and Bertrand Equilibrium Price Dispersion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 117-31, February.
    6. Salop, S & Stiglitz, J E, 1982. "The Theory of Sales: A Simple Model of Equilibrium Price Dispersion with Identical Agents," American Economic Review, American Economic Association, vol. 72(5), pages 1121-30, December.
    7. 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.
    8. Salop, Steven & Stiglitz, Joseph E, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 493-510, October.
    9. Feldman, Roger D & Begun, James W, 1980. "Does Advertising of Prices Reduce the Mean and Variance of Prices?," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 18(3), pages 487-92, July.
    10. Glazer, Amihai, 1981. "Advertising, Information, and Prices-A Case Study," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 19(4), pages 661-71, October.
    11. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 69, pages 213.
    12. Rauh, Michael T., 1997. "A Model of Temporary Search Market Equilibrium," Journal of Economic Theory, Elsevier, vol. 77(1), pages 128-153, November.
    13. Benham, Lee, 1972. "The Effect of Advertising on the Price of Eyeglasses," Journal of Law and Economics, University of Chicago Press, vol. 15(2), pages 337-52, October.
    14. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 465-91, October.
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