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Persistent Price Dispersion in Online Markets

Michael Baye, John Morgan and Patrick Scholten
Additional contact information
Patrick Scholten: Bentley College

No 2006-12, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

Abstract: Using data from one of the Internet’s leading price comparison sites for consumer electronics products, we present evidence for the persistence of price dispersion for 36 homogeneous products. The markets for these products are “thick” with an average of over 20 firms selling each product. We show that prices do not converge to the “law of one price” even after an 18 month period. This finding is robust to controls for differences in shipping charges and inventories. Further, we show that product life cycle effects lead to changes in the number of competing firms and the range of price dispersion consistent with the theoretical predictions of the Varian (1980) model. The average number of competing firms declines from about 28 to 10 during the final five months of our dataset. Over this same period, the average range in prices decreases from about 75 percent to 30 percent. After accounting for firm heterogeneities in costs, branding, reputation, trust, product availability and shipping costs, 28 percent of the variation in prices charged for homogeneous products remains unexplained. This is also consistent with the Varian model.

Keywords: Price dispersion; Internet; Law of One Price (search for similar items in EconPapers)
JEL-codes: D4 D8 L13 M3 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-com, nep-mic and nep-mkt
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Published in The New Economy and Beyond: Past Present and Future, 2006

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