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  • Jose Luis Moraga-Gonzalez

    (ICREA, IESE Business School, and University of Groningen)

  • Matthijs R. Wildenbeest

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

Abstract

Web search technologies are fundamental tools to easily navigate through the huge amount of information available in the Internet. One particular type of search technologies are the so- called shopbots, or comparison sites. The emergence of Internet shopbots and their implications for price competition and market efficiency are the focus of this chapter. We develop a simple model where a price comparison site tries to attract (possibly vertically and horizontally differentiated) online retailers on the one hand, and consumers on the other hand. The analysis of the model reveals that differentiation among the products of the retailers as well as their ability to price discriminate between on- and off-comparison-site consumers play a critical role. When products are homogeneous, if online retailers cannot charge different on- and off-the-comparison- site prices, then the comparison site has incentives to charge fees so high that some firms are excluded, which generates price dispersion and an inefficient outcome. By contrast, when on- and off-comparison-site prices can be different, the comparison site attracts all the players to the platform and the allocation is efficient. A similar result obtains when products are horizontally differentiated. In that case, the comparison site becomes an aggregator of product information and no matter whether firms can price discriminate or not, the comparison site attracts all the players to the platform and an efficient outcome ensues. We argue that the lack of vertical product differentiation may also be critical for this efficiency result. In fact, we show that when quality differences are large, the comparison site may find it profitable to charge fees such that low quality producers are excluded, thereby inducing an inefficient outcome.

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File URL: http://www.bus.indiana.edu/riharbau/RePEc/iuk/wpaper/bepp2011-04-moraga-gonzalez-wildenbeest.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 2011-04.

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Date of creation: May 2011
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Handle: RePEc:iuk:wpaper:2011-04

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References

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  1. 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.
  2. 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.
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Citations

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Cited by:
  1. Michael R. Baye & Babur De los Santos & Matthijs R. Wildenbeest, 2013. "Searching for Physical and Digital Media: The Evolution of Platforms for Finding Books," Working Papers 2013-04, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  2. Makoto Watanabe, 2012. "Middlemen: A Directed Search Equilibrium Approach," Tinbergen Institute Discussion Papers 12-138/V, Tinbergen Institute.

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