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Information, Search, and Price Dispersion

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Author Info
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)

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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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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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L0 - Industrial Organization - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Price Dispersion In The Small And In The Large: Evidence From An Internet Price Comparison Site," Journal of Industrial Economics, Blackwell Publishing, vol. 52(4), pages 463-496, December. [Downloadable!] (restricted)
    Other versions:
  2. Axel, Bo, 1977. " Search Market Equilibrium," Scandinavian Journal of Economics, Blackwell Publishing, vol. 79(1), pages 20-40.
  3. Oecd, 1998. "Electronic Commerce: Prices and Consumer Issues for Three Products: Books, Compact Discs and Software," OECD Digital Economy Papers 32, OECD, Directorate for Science, Technology and Industry. [Downloadable!]
  4. 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. [Downloadable!]
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  5. 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. [Downloadable!]
  6. Kathy Baylis & Jeffrey Perloff, 2001. "Price Dispersion on the Internet: Good Firms and Bad Firms," Institute for Research on Labor and Employment, Working Paper Series 1019, Institute of Industrial Relations, UC Berkeley. [Downloadable!]
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  7. 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. [Downloadable!]
  8. 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. [Downloadable!]
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  9. 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. [Downloadable!] (restricted)
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  10. 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. [Downloadable!] (restricted)
  11. Dana, J.D., 1991. "Learning in an Equilibrium Search Model," Papers 37, Stanford - Institute for Thoretical Economics.
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  12. 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. [Downloadable!] (restricted)
  13. Saul Lach, 2002. "Existence And Persistence Of Price Dispersion: An Empirical Analysis," The Review of Economics and Statistics, MIT Press, vol. 84(3), pages 433-444, August. [Downloadable!] (restricted)
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  14. Daughety, Andrew F, 1992. "A Model of Search and Shopping by Homogeneous Customers without Price Precommitment by Firms," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 1(3), pages 455-73, Fall.
  15. Glenn Ellison & Sara Fisher Ellison, 2004. "Search, Obfuscation, and Price Elasticities on the Internet," NBER Working Papers 10570, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Austan Goolsbee & Judith Chevalier, 2002. "Measuring Prices and Price Competition Online: Amazon and Barnes and Noble," NBER Working Papers 9085, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Benabou, Roland & Gertner, Robert, 1993. "Search with Learning from Prices: Does Increased Inflationary Uncertainty Lead to Higher Markups?," Review of Economic Studies, Blackwell Publishing, vol. 60(1), pages 69-94, January. [Downloadable!] (restricted)
  18. Baye, Michael R. & Kovenock, Dan, 1994. "How to sell a pickup truck : 'Beat-or-pay' advertisements as facilitating devices," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 21-33, March. [Downloadable!] (restricted)
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  19. Michael Smith & Erik Brynjolfsson, 1999. "Frictionless Commerce? A Comparison of Internet and Conventional Retailers," Computing in Economics and Finance 1999 1022, Society for Computational Economics.
  20. Severin Borenstein & Nancy L. Rose, 1995. "Competition and Price Dispersion in the U.S. Airline Industry," NBER Working Papers 3785, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Goolsbee, Austan, 2001. "Competition in the Computer Industry: Online versus Retail," Journal of Industrial Economics, Blackwell Publishing, vol. 49(4), pages 487-99, December. [Downloadable!] (restricted)
  22. 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. [Downloadable!] (restricted)
  23. 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. [Downloadable!] (restricted)
  24. Friberg, Richard & Ganslandt, Mattias & Sandström, Mikael, 2001. "Pricing Strategies in E-Commerce: Bricks vs. Clicks," Working Paper Series 559, Research Institute of Industrial Economics. [Downloadable!]
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  25. 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. [Downloadable!]
  26. 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. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Wilson, Chris M, 2009. "Market Frictions: A Unified Model of Search and Switching Costs," MPRA Paper 13672, University Library of Munich, Germany. [Downloadable!]
  2. Felix J. J. Vardy & John Morgan, 2006. "Diversity in the Workplace," IMF Working Papers 06/237, International Monetary Fund. [Downloadable!]
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  3. Matthijs R Wildenbeest, 2009. "An Empirical Model of Search with Vertically Differentiated Products," Working Papers 2009-01, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
  4. Michael R. Baye & J. Rupert J. Gatti & Paul Kattuman & John Morgan, 2005. "Did the Euro Foster Online Price Competition? Evidence from an International Price Comparison Site," Working Papers 2005-09, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
    Other versions:
  5. Mustafa Caglayan & Alpay Filiztekin & Michael T. Rauh, 2006. "Inflation, Price Dispersion, and Market Structure," Working Papers 2006-03, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
    Other versions:
  6. Ian McCarthy, 2008. "Advertising Intensity and Welfare in an Equilibrium Search Model," Caepr Working Papers 2008-003, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
  7. Michael R. Baye & John Morgan, 2005. "Brand and Price Advertising in Online Markets," Working Papers 2005-08, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
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  8. Cerqueiro, G.M. & Degryse, H.A. & Ongena, S., 2007. "Rules versus Discretion in Loan Rate Setting," Discussion Paper 2007-026, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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  9. Michael R. Baye & J. Rupert J. Gatti & Paul Kattuman & John Morgan, 2006. "Clicks, Discontinuities, and Firm Demand Online," Working Papers 2006-21, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
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  10. Michael A. Arnold & Chenguang Li & Christine Saliba & Lan Zhang, 2008. "Asymmetric Market Shares, Advertising, and Pricing: Equilibrium with an Information Gatekeeper," Working Papers 08-14, University of Delaware, Department of Economics. [Downloadable!]
  11. Michael T. Rauh, 2006. "Strategic Complementarities and Search Market Equilibrium," Working Papers 2006-01, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
  12. Yoonhee Tina Chang & Catherine Waddams Price, 2008. "Gain or Pain: Does Consumer Activity Reflect Utility Maximisation?," Working Papers 08-15, Centre for Competition Policy, University of East Anglia. [Downloadable!]
  13. Rosa Branca Esteves, 2007. "Customer Poaching and Advertising," NIPE Working Papers 12/2007, NIPE - Universidade do Minho. [Downloadable!]
  14. Ian McCarthy, 2008. "Simulating Sequential Search Models with Genetic Algorithms: Analysis of Price Ceilings, Taxes, Advertising and Welfare," Caepr Working Papers 2008-010, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
  15. Chen, Yongmin & Zhang, Tianle, 2009. "Equilibrium price dispersion with heterogeneous searchers," MPRA Paper 16490, University Library of Munich, Germany. [Downloadable!]
  16. Il-Horn Hann & Kai-Lung Hui & Sang-Yong Tom Lee & Ivan P.L. Png, 2005. "Sales and Promotions: A More General Model," Industrial Organization 0508014, EconWPA. [Downloadable!]
  17. Giacomo Pasini & Paolo Pin & Simon Weidenholzer, 2008. "A Network Model of Price Dispersion," Working Papers 2008.28, Fondazione Eni Enrico Mattei. [Downloadable!]
  18. Michael Rauh, 2005. "Complementarity, Search, and Price Dispersion," Game Theory and Information 0508008, EconWPA. [Downloadable!]
  19. Maarten C.W. Janssen & Alexei Parakhonyak, 2007. "Optimal Search with Costly Recall," Tinbergen Institute Discussion Papers 08-002/1, Tinbergen Institute. [Downloadable!]
  20. Glenn Ellison & Alexander Wolitzky, 2009. "A Search Cost Model of Obfuscation," NBER Working Papers 15237, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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