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Information, Search, and Price Dispersion

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  • 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

We provide a unified treatment of alternative models of information acquisition/transmission that have been advanced to rationalize price dispersion in online and offline markets for homogeneous products. These different frameworks -- which include sequential search, fixed sample search, and clearinghouse models -- reveal that reductions in (or the elimination of) consumer search costs need not reduce (or eliminate) price dispersion. Our treatment highlights a "duality" between search-theoretic and clearinghouse models of dispersion, and shows how auction-theoretic tools may be used to simplify (and even generalize) existing theoretical results. We conclude with an overview of the burgeoning empirical literature. The empirical evidence suggests that price dispersion in both online and offline markets is sizeable, pervasive, and persistent and does not purely stem from subtle differences in firms' products or services.

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File URL: http://www.bus.indiana.edu/riharbau/RePEc/iuk/wpaper/bepp2006-11-baye-morgan-scholten.pdf
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Bibliographic Info

Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2006-11.

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Date of creation: Dec 2006
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Publication status: Forthcoming in the Handbook on Economics and Information Systems
Handle: RePEc:iuk:wpaper:2006-11

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References

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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. Maria Arbatskaya & Michael R. Baye, 2004. "Are Prices ‘Sticky’ Online? Market Structure Effects and Asymmetric Responses to Cost Shocks in Online Mortgage Markets," Working Papers 2004-01, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  3. Michael R. Baye & J. Rupert J. Gatti & Paul Kattuman & John Morgan, 2005. "Estimating Firm-Level Demand at a Price Comparison Site: Accounting for Shoppers and the Number of Competitors," Microeconomics 0504005, EconWPA.
  4. Janssen, Maarten C.W. & Moraga-Gonzalez, Jose Luis & Wildenbeest, Matthijs R., 2005. "Truly costly sequential search and oligopolistic pricing," International Journal of Industrial Organization, Elsevier, vol. 23(5-6), pages 451-466, June.
  5. Baye, M. & Kovenock, D., 1990. "How To Sell a Pickup Truck : "Beat-or-Pay" Advertisements as Facilitating Devices," Discussion Paper 1990-53, Tilburg University, Center for Economic Research.
  6. Austan Goolsbee & Judith Chevalier, 2002. "Measuring Prices and Price Competition Online: Amazon and Barnes and Noble," Yale School of Management Working Papers ysm290, Yale School of Management, revised 12 Sep 2008.
  7. 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.
  8. Axel, Bo, 1977. " Search Market Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(1), pages 20-40.
  9. Eric K. Clemons & Il-Horn Hann & Lorin M. Hitt, 2002. "Price Dispersion and Differentiation in Online Travel: An Empirical Investigation," Management Science, INFORMS, vol. 48(4), pages 534-549, April.
  10. Friberg, Richard & Ganslandt, Mattias & Sandström, Mikael, 2001. "Pricing Strategies in E-Commerce: Bricks vs. Clicks," Working Paper Series 559, Research Institute of Industrial Economics.
  11. Saul Lach, 2002. "Existence and Persistence of Price Dispersion: an Empirical Analysis," NBER Working Papers 8737, National Bureau of Economic Research, Inc.
  12. Goolsbee, Austan, 2001. "Competition in the Computer Industry: Online versus Retail," Journal of Industrial Economics, Wiley Blackwell, vol. 49(4), pages 487-99, December.
  13. Daughety, Andrew F, 1992. "A Model of Search and Shopping by Homogeneous Customers without Price Precommitment by Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(3), pages 455-73, Fall.
  14. Baylis, Kathy & Perloff, Jeffrey M., 2001. "Price Dispersion on the Internet: Good Firms and Bad Firms," Institute for Research on Labor and Employment, Working Paper Series qt2t0770rn, Institute of Industrial Relations, UC Berkeley.
  15. Mark J. Roberts & Dylan Supina, 1997. "Output Price and Markup Dispersion in Micro Data: The Roles of Producer Heterogeneity and Noise," NBER Working Papers 6075, National Bureau of Economic Research, Inc.
  16. Erik Brynjolfsson & Michael D. Smith, 2000. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Management Science, INFORMS, vol. 46(4), pages 563-585, April.
  17. Oecd, 1998. "Electronic Commerce: Prices and Consumer Issues for Three Products: Books, Compact Discs and Software," OECD Digital Economy Papers 32, OECD Publishing.
  18. Glenn Ellison & Sara Fisher Ellison, 2009. "Search, Obfuscation, and Price Elasticities on the Internet," Econometrica, Econometric Society, vol. 77(2), pages 427-452, 03.
  19. Dana, James D, Jr, 1994. "Learning in an Equilibrium Search Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 745-71, August.
  20. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  21. Ronald Johnson, 2002. "Search Costs, Lags and Prices at the Pump," Review of Industrial Organization, Springer, vol. 20(1), pages 33-50, February.
  22. Baye, Michael R. & Kovenock, Dan & de Vries, Casper G., 1992. "It takes two to tango: Equilibria in a model of sales," Games and Economic Behavior, Elsevier, vol. 4(4), pages 493-510, October.
  23. Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Temporal Price Dispersion: Evidence from an Online Consumer Electronics Market," Working Papers 2004-04, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  24. J. Yannis Bakos, 1997. "Reducing Buyer Search Costs: Implications for Electronic Marketplaces," Management Science, INFORMS, vol. 43(12), pages 1676-1692, December.
  25. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-83, August.
  26. Michael R. Baye & John Morgan, 2004. "Price Dispersion in the Lab and on the Internet: Theory and Evidence," Working Papers 2004-02, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  27. Maarten C. W. Janssen & José Luis Moraga-González, 2004. "Strategic Pricing, Consumer Search and the Number of Firms," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1089-1118, October.
  28. Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Price Dispersion in the Small and in the Large: Evidence from an Internet Price Comparison Site," Working Papers 2004-03, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  29. Barron, John M. & Taylor, Beck A. & Umbeck, John R., 2004. "Number of sellers, average prices, and price dispersion," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1041-1066, November.
  30. 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.
  31. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June.
  32. Benabou, Roland & Gertner, Robert, 1993. "Search with Learning from Prices: Does Increased Inflationary Uncertainty Lead to Higher Markups?," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 69-94, January.
  33. E. Woodrow Eckard, 2004. "The "Law of One Price" in 1901," Economic Inquiry, Western Economic Association International, vol. 42(1), pages 101-110, January.
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