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Do Internet Converge Prices to the "Law of One Price"? Evidence from Transaction Data for Airline Tickets

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    Abstract

    Internet presumably reduces search cost driving price to the competitive level. Evidence from empirical research quantifying dispersion in the electronic based markets has yield mixed results. More recent research has documented near zero dispersion in the electronic markets using transaction prices. This paper is one of only a handful of papers to examine the impact of internet on price dispersion using contemporaneous online and offline transaction data for airline ticket prices. The paper finds strong empirical evidence of lower dispersion in the electronic markets compared to the traditional markets, but fails to find evidence of near zero dispersion in the electronic markets, even with transaction prices. The results suggest that electronic markets exhibits significantly lower but positive dispersion, in contrary to the near zero dispersion as found in more recent empirical literature.

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    File URL: http://www.netinst.org/Sengupta_07-26.pdf
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    Bibliographic Info

    Paper provided by NET Institute in its series Working Papers with number 07-26.

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    Length: 64 pages
    Date of creation: Sep 2007
    Date of revision: Sep 2007
    Handle: RePEc:net:wpaper:0726

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    Web page: http://www.NETinst.org/

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    Keywords: Price Dispersion; Search cost; Online; Offline; Transaction Prices;

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    1. Clay, Karen & Krishnan, Ramayya & Wolff, Eric, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 49(4), pages 521-39, December.
    2. Severin Borenstein & Nancy L. Rose, 1991. "Competition and Price Dispersion in the U.S. Airline Industry," NBER Working Papers 3785, National Bureau of Economic Research, Inc.
    3. 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, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2004-03, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    4. 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.
    5. Michael R. Baye & John Morgan, 2004. "Price Dispersion in the Lab and on the Internet: Theory and Evidence," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2004-02, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    6. J. Yannis Bakos, 1997. "Reducing Buyer Search Costs: Implications for Electronic Marketplaces," Management Science, INFORMS, INFORMS, vol. 43(12), pages 1676-1692, December.
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