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Information, Search, and Price Dispersion

Michael Baye, John Morgan and Patrick Scholten
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Patrick Scholten: Bentley College

No 2006-11, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

Abstract: We provide a unified treatment of alternative models of information acquisition/transmission that have been advanced to rationalize price dispersion in online and offline markets for homogeneous products. These different frameworks -- which include sequential search, fixed sample search, and clearinghouse models -- reveal that reductions in (or the elimination of) consumer search costs need not reduce (or eliminate) price dispersion. Our treatment highlights a "duality" between search-theoretic and clearinghouse models of dispersion, and shows how auction-theoretic tools may be used to simplify (and even generalize) existing theoretical results. We conclude with an overview of the burgeoning empirical literature. The empirical evidence suggests that price dispersion in both online and offline markets is sizeable, pervasive, and persistent and does not purely stem from subtle differences in firms' products or services.

JEL-codes: L0 (search for similar items in EconPapers)
Date: 2006-12
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Forthcoming in the Handbook on Economics and Information Systems

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