The economics of retail pricing on the Internet

Price dispersion is a pervasive phenomenon in both traditional and electronic retail markets. The primary purpose of this dissertation is to empirically analyze the determinants of price dispersion in the idealized settings of some retail electronic markets, where one might expect to observe the "law of one price."; Many empirical studies of price dispersion purport its persistence; yet no study has analyzed dispersion for periods longer than about one year. Chapter 2 offers a simple historical analysis of price dispersion spanning a 24-year period. A 1976 study documenting price dispersion in traditional retail markets is compared to price dispersion observed in traditional retail and electronic retail markets in 2000. Contrary to popular predictions, the casual evidence indicates that price dispersion observed in 1976 is comparable to the levels observed in 2000. This suggests that, for this pool of products, the Information Age has had little impact on reducing price dispersion in traditional or electronic marketplaces.; One particularly influential Internet institution is the "price comparison service;" an institution permitting consumers to simultaneously gather price information for physically identical products from several sellers. Thus, price comparison services offer a new way for consumers' to identify low-price sellers. Chapters 3 and 4 focus on describing the nature of price dispersion at one particular price comparison service, Shopper.com.; Chapter 3 provides empirical evidence that price dispersion is a persistent phenomenon. Over an 18-month period, observable differences in shipping charges and inventories leave 83 percent of the variability in prices unexplained. Controlling for firm-level heterogeneities leaves 28 percent of the variability in prices unexplained.; The analysis of the determinants of persistent price dispersion at Shopper.com is continued in Chapter 4. Specifically, I find evidence that the level of price dispersion varies systematically with market structure. The "gap" between the two lowest listed prices for a given product-date averages about 20 percent in duopoly markets and systematically declines. In markets where 17 firms list prices (the sample average), the average percentage gap in the market is about 3.5. These results are consistent with a host of theoretical clearinghouse models predicting equilibrium price dispersion.