Michael R. Baye (Kelley School of Business, Indiana University) J. Rupert J. Gatti (Trinity College, University of Cambridge) Paul Kattuman (The Judge Institute of Management, University of Cambridge) John Morgan (Haas School of Business & Department of Economics, University of California, Berkeley)
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Clearinghouse models of online pricing---such as Varian (1980), Rosenthal (1980), Narasimhan (1988), and Baye-Morgan (2001)---view a price comparison site as an 'information clearinghouse' where shoppers and loyals obtain price and product information to make online purchases. These models predict that the responsiveness of a firm's demand to a change in its price depends on the number of sellers and whether the price change results in the firm charging the lowest price in the market. Using a unique firm-level dataset from Kelkoo.com (Yahoo!'s European price comparison site), we examine these predictions by providing estimates of the demand for PDAs. Our results indicate that the number of competing sellers and both the firm's location on the screen and relative ranking in the list of prices are important determinants of an online retailer's demand. We find that an online monopolist faces an elasticity of demand of about -2, while sellers competing against 10 other sellers face an elasticity of about -6. We also find empirical evidence of a discontinuous jump in a firm's demand as its price declines from the second-lowest to the lowest price. Our estimates suggest that about 13% of the consumers at Kelkoo are 'shoppers' who purchase from the seller offering the lowest price.
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Paper provided by EconWPA in its series Microeconomics with number
0504005.
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.:
Varian, Hal R, 1980.
"A Model of Sales,"
American Economic Review,
American Economic Association, vol. 70(4), pages 651-59, September.
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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.)
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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Michael R. Baye & John Morgan & Patrick Scholten, 2006.
"Information, Search, and Price Dispersion,"
Working Papers
2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
[Downloadable!]