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Clicks, Discontinuities, and Firm Demand Online

  • Baye, Michael R
  • Gatti, J. Rupert J
  • Kattuman, Paul
  • Morgan, John

The market values of online platforms, such as Yahoo, stem from their ability to monetize the clicks they generate for firms advertising on their sites. We exploit a unique dataset on clicks from one of Yahoo's price comparison sites to estimate the determinants of clicks received by online retailers. We find that a firm enjoys a 60% jump in its clicks when it offers the lowest price at the site. This discontinuity is consistent with a variety of models that have been used to rationalize the price dispersion observed in online markets. We also show that one may use estimates of the determinants of a firm's clicks to obtain bounds on its underlying demand parameters, including own- and cross-price elasticities. Our results have potentially significant ramifications for online retailers, platforms, and policymakers: Failure to account for discontinuities distorts parameter estimates by 50 to 100 percent.

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Paper provided by Competition Policy Center, Institute for Business and Economic Research, UC Berkeley in its series Competition Policy Center, Working Paper Series with number qt3qg7270w.

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Date of creation: 01 Nov 2006
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Handle: RePEc:cdl:compol:qt3qg7270w
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