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

Michael Baye and John Morgan

RAND Journal of Economics, 2004, vol. 35, issue 3, 448-466

Abstract: 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.

Date: 2004
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