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Persistent Price Dispersion in Online Markets

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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)

Abstract

Using data from one of the Internet’s leading price comparison sites for consumer electronics products, we present evidence for the persistence of price dispersion for 36 homogeneous products. The markets for these products are “thick” with an average of over 20 firms selling each product. We show that prices do not converge to the “law of one price” even after an 18 month period. This finding is robust to controls for differences in shipping charges and inventories. Further, we show that product life cycle effects lead to changes in the number of competing firms and the range of price dispersion consistent with the theoretical predictions of the Varian (1980) model. The average number of competing firms declines from about 28 to 10 during the final five months of our dataset. Over this same period, the average range in prices decreases from about 75 percent to 30 percent. After accounting for firm heterogeneities in costs, branding, reputation, trust, product availability and shipping costs, 28 percent of the variation in prices charged for homogeneous products remains unexplained. This is also consistent with the Varian model.

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File URL: http://www.bus.indiana.edu/riharbau/RePEc/iuk/wpaper/bepp2006-12-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 2006-12.

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Date of creation: 2006
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Publication status: Published in The New Economy and Beyond: Past Present and Future, 2006
Handle: RePEc:iuk:wpaper:2006-12

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Keywords: Price dispersion; Internet; Law of One Price;

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References

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  1. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September.
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  13. Yannis Bakos, 2001. "The Emerging Landscape for Retail E-Commerce," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 69-80, Winter.
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Citations

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Cited by:
  1. 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.
  2. 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.
  3. Claudio A. Piga & Enrico Bachis, 2007. "Hub Premium, Airport Dominance and Market Power in the European Airline Industry," Discussion Paper Series 2007_11, Department of Economics, Loughborough University, revised Apr 2007.
  4. Gerard J. Berg, 2006. "Revolutionary Effects of New Information Technologies," Economic Journal, Royal Economic Society, vol. 116(509), pages F10-F28, 02.
  5. Rosa Branca Esteves, 2007. "Pricing with Customer Recognition," NIPE Working Papers 27/2007, NIPE - Universidade do Minho.
  6. Claudio A. Piga & Enrico Bachis, 2006. "Pricing strategies by European traditional and low cost airlines. Or, when is it the best time to book on line?," Discussion Paper Series 2006_14, Department of Economics, Loughborough University, revised Jul 2006.
  7. Michael A. Arnold & Thierry Pénard, 2007. "Bargaining and Fixed Price Offers: How Online Intermediaries are Changing New Car Transactions," Working Papers 07-03, University of Delaware, Department of Economics.
  8. Erik Brynjolfsson & Astrid Dick & Michael Smith, 2010. "A nearly perfect market?," Quantitative Marketing and Economics, Springer, vol. 8(1), pages 1-33, March.
  9. Michelle Haynes & Steve Thompson, 2013. "Entry and Exit Behavior in the Absence of Sunk Costs: Evidence from a Price Comparison Site," Review of Industrial Organization, Springer, vol. 42(1), pages 1-23, February.
  10. Zhenlin Yang & Lydia Gan & Fang-Fang Tang, 2007. "A Study of Pricing Evolution in the Online Toy Market," Economic Growth centre Working Paper Series 0704, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.

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