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Why are product prices in online markets not converging?

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Author Info

  • Takayuki Mizuno

    (National Institute of Informatics, Graduate School of Economics, University of Tokyo, The Canon Institute for Global Studies)

  • Tsutomu Watanabe

    (Graduate School of Economics, University of Tokyo, The Canon Institute for Global Studies)

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    Abstract

    Why are product prices in online markets dispersed in spite of very small search costs? To address this question, we construct a unique dataset from a Japanese price comparison site, which records price quotes offered by e-retailers as well as customers’ clicks on products, which occur when they proceed to purchase the product. We find that the distribution of prices retailers quote for a particular product at a particular point in time (divided by the lowest price) follows an exponential distribution, showing the presence of substantial price dispersion. For example, 20 percent of all retailers quote prices that are more than 50 percent higher than the lowest price. Next, comparing the probability that customers click on a retailer with a particular rank and the probability that retailers post prices at a particular rank, we show that both decline exponentially with price rank and that the exponents associated with the probabilities are quite close. This suggests that the reason why some retailers set prices at a level substantially higher than the lowest price is that they know that some customers will choose them even at that high price. Based on these findings, we hypothesize that price dispersion in online markets stems from heterogeneity in customers’ preferences over retailers; that is, customers choose a set of candidate retailers based on their preferences, which are heterogeneous across customers, and then pick a particular retailer among the candidates based on the price ranking.

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    Bibliographic Info

    Paper provided by University of Tokyo, Graduate School of Economics in its series UTokyo Price Project Working Paper Series with number 007.

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    Length: 15 pages
    Date of creation: Apr 2013
    Date of revision:
    Handle: RePEc:upd:utppwp:007

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    Postal: University of Tokyo 702 Faculty of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan
    Phone: +81-3-3812-2111
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    Web page: http://www.e.u-tokyo.ac.jp/
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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 & 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.
    3. Glenn Ellison & Sara Fisher Ellison, 2005. "Lessons About Markets from the Internet," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 139-158, Spring.
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