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Information, Search, and Price Dispersion

Author

Listed:
  • Michael R. Baye

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

  • John Morgan

    (Haas School of Business and Department of Economics, University of California, Berkeley)

  • Patrick Scholten

    (Bentley College)

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.

Suggested Citation

  • Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    • Handle: RePEc:iuk:wpaper:2006-11
    as

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    File URL: http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2006-11-baye-morgan-scholten.pdf
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    References listed on IDEAS

    as
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    7. Austan Goolsbee & Judith Chevalier, 2002. "Measuring Prices and Price Competition Online: Amazon and Barnes and Noble," NBER Working Papers 9085, National Bureau of Economic Research, Inc.
    8. Gatti, J.R.J. & Kattuman, P., 2003. "Online Price Dispersion Within and Between Seven European Countries," Cambridge Working Papers in Economics 0343, Faculty of Economics, University of Cambridge.
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    Full references (including those not matched with items on IDEAS)

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