The Effect of Electronic Commerce on Geographic Purchasing Patterns and Price Dispersion

Eric Overby () and Chris Forman ()
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Eric Overby: Scheller College of Business, Georgia Institute of Technology, Atlanta, Georgia 30308
Chris Forman: Scheller College of Business, Georgia Institute of Technology, Atlanta, Georgia 30308

Management Science, 2015, vol. 61, issue 2, 431-453

Abstract: The “law of one price” states that if prices for the same or highly similar goods vary across geographic locations by more than the cost of transport, then traders will shift supply and demand to exploit the price differences. However, several frictions prevent traders from doing this, including lack of information about prices and difficulty trading across locations. Electronic commerce has the potential to reduce these frictions by increasing price visibility and lowering transaction costs. We analyze this by studying how the diffusion of an electronic channel affected geographic trading patterns and price dispersion in the wholesale used vehicle market from 2003 to 2008. We find that buyers used the channel to shift their demand geographically to exploit price differences, which reduced geographic price dispersion. We find that the electronic channel also influenced how sellers distributed supply, but we find little evidence that this led to reduced geographic price dispersion. This paper was accepted by Lorin Hitt, information systems.

Keywords: electronic commerce; electronic channels; electronic markets; price dispersion; geographic trade; wholesale automotive; auctions; law of one price; discrete choice; coarsened exact matching (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (10)

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