Price Dispersion in Online Markets: The Case of College Textbooks
AbstractIn his seminal work, Stigler (1961) argued that price dispersion for a homogeneous product is an indication of consumer ignorance. Ready access to price information on the Internet has led to many claims that ignorance will not persist in online markets, and that online prices for a homogenous good will converge to the competitive price. However, a growing body of empirical research provides strong evidence of persistent price dispersion in online markets. In this paper we present a simple model which illustrates how price dispersion can exist in equilibrium even when all consumers are perfectly informed about the prices charged by all firms. The equilibrium relies on the fact that although prices are common knowledge, information about the availability of the product at any particular firm can only be obtained at a positive cost. We test the model using data from the online market for college textbooks. The empirical results indicate that price dispersion exists in the online market for college textbooks, and support the predictions of the theoretical model that in a equilibrium with price dispersion some firms adopt a high-price, high-availability strategy while others adopt a low-price, low-availability strategy.
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Bibliographic InfoPaper provided by University of Delaware, Department of Economics in its series Working Papers with number 03-02.
Length: 30 pages
Date of creation: 2003
Date of revision:
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Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
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Find related papers by JEL classification:
- D4 - Microeconomics - - Market Structure and Pricing
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- L19 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Other
- L89 - Industrial Organization - - Industry Studies: Services - - - Other
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