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Price Dispersion in the Lab and on the Internet: Theory and Evidence

  • Michael R. Baye

    ()

    (Indiana University)

  • John Morgan

    ()

    (University of California, Berkeley)

Price dispersion is ubiquitous in settings that closely approximate textbook Bertrand competition. We show that only a little bounded rationality among sellers is needed to rationalize such dispersion. A variety of statistical tests, based on datasets from two independent laboratory experiments and structural estimates of the parameters of our models, suggest that bounded-rationality-based theories of price dispersion organize the data remarkably well. Evidence is also presented to suggest that the models are consistent with data from a leading Internet price comparison site.

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Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 35 (2004)
Issue (Month): 3 (Autumn)
Pages: 448-466

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Handle: RePEc:rje:randje:v:35:y:2004:3:p:448-466
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