<p>Yes, this has actually been quite an active area for research within the consumer search literature. As a starting point, I would recommend looking at the following:</p>

<ul>
<li><p><strong><a href="https://www.aeaweb.org/articles.php?doi=10.1257/aer.91.3.454">BAYE, M. R., AND J. MORGAN (2001): “Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets”, <em>American Economic Review</em>, 91(2), 454–474.</a></strong> These authors have a model that is interesting because it explains the persistence of price dispersion, even in environments like price comparison sites where one would ordinarily think that all consumers will buy from the lowest-priced merchant. The intuition is closely related to that of <a href="http://people.ischool.berkeley.edu/~hal/Papers/model-of-sales.pdf">Varian's classic model of sales</a>, if you know that. The idea is that some firms price low to sell to the consumers on the price comparison site, whilst others price high to sell to less-informed consumers who do not use the price comparison site and therefore do not compare as many prices.</p></li>
<li><p><strong><a href="http://www.bus.indiana.edu/riharbau/repec/iuk/wpaper/bepp2004-03-baye-morgan-scholten.pdf">BAYE, M. R., J. MORGAN AND P. SCHOLTEN (2004): “Price Dispersion in the Small and in the Large: Evidence From an Internet Price Comparison Site”, <em>Journal of Industrial Economics</em>, 52(4), 463–496.</a> (older working paper link).</strong> This is interesting because they test various models (including the one mentioned above) against data from a price comparison site.</p></li>
<li><p><strong><a href="https://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2955">De Los Santos, B., A. Hortaçsu, and M. R. Wildenbeest (2012): "Testing Models of Consumer Search Using Data on Web Browsing and Purchasing Behavior." <em>American Economic Review</em>, 102(6), 2955-80.</a></strong> Not directly related to the question, but an interesting take on a similar issue. There are two classic models of consumer search: sequential and fixed-sample. In sequential search, consumers visit a merchant, evaluate its offer and decide whether to search again; repeating his process until they find an offer they are willing to accept. In fixed-sample search consumers first decide the number $n$ of merchants they will visit; they then visit precisely $n$ merchants and buy the best offer among them. Given dispersed prices, sequential search is optimal and the fixed-sample strategy is not. These authors test the two models against data from online retailers and find evidence to suggest that consumers use a strategy closer to the fixed-sample end of the spectrum.</p></li>
</ul>

<p>A couple of extra references to finish up:</p>

<ul>
<li><strong><a href="http://faculty.haas.berkeley.edu/rjmorgan/Information%20Search%20and%20Price%20Dispersion.pdf">BAYE, M. R., J. MORGAN AND P. SCHOLTEN (2006): “Information, Search, and Price Dispersion”, in T. HENDERSHOTT (ed.) <em>Handbook of Economics and Information Systems</em>, Elsevier Science, 323–371</a></strong> A nice survey of theories of search and price dispersion that can give you an idea of what work has been done on these general phenomena (and possibly some ideas of what can be empirically tested?).</li>
<li><strong><a href="http://economics.mit.edu/files/7205">ELLISON, G., AND S. F. ELLISON (2009): “Search, Obfuscation, and Price Elasticities on the Internet”, <em>Econometrica</em>, 77(2), 427–452</a></strong> A study of how firms can obfuscate the search process to maintain market power in a frictionless context like a price comparison site. Ellison and Wolitzky also have a nice theoretical paper on this phenomenon in the <em>RAND Journal of Economics</em>.</li>
</ul>

CC BY-SA 3.0
2014-11-23T17:06:04.493Z
@Ubiquitous (+1). Regarding the "De Los Santos et al" paper, are they also dealing with information costs and uncertainty? Any open-ended algorithm ("continue searching until...") creates uncertainty about the length and the costs of the process. Look at businesses: Most Procurement departments determine a preset fixed number of offers (usually no less than three, rarely more than five) that they will seek to receive in order to decide on a purchase. There is a reason for that.
Alecos Papadopoulos
CC BY-SA 3.0
2014-11-23T17:21:39.090Z
@AlecosPapadopoulos Yes, the sequential search model (which is much older than De Los Santos et al.) does take account of these costs. Still, sequential search is optimal. The way it works is that the consumer calculates a reserve price, $r$, such that they would be indifferent between buying at that price and continuing to incur costs of search. They buy as soon as they find a price below $r$. A key result of this literature is that, although the length of the search is uncertain, the reserve price is stationary throughout the whole search process. <Continued below>
Ubiquitous
CC BY-SA 3.0
2014-11-23T17:23:30.740Z
<continued from above> An intuitive reason why the fixed-sample search is not optimal is this: suppose you decide to search five stores, but the first store is very very cheap. You would then regret having committed yourself to spending time searching four more. Conversely if all of the first five offers are very expensive you would wish that you had planned to search for longer. The sequential search model doesn't suffer this problem because the search horizon changes depending on whether you get an early offer below the reserve price or not.
Ubiquitous
CC BY-SA 3.0
2014-11-23T17:31:35.030Z
@Ubiquitous Are there empirical evidence that economic agents tend to prefer the sequential search model? Given accumulated experience, consumers would know some "average length" and hence feel some comfort that the process won't go on indefinitely. This works in favor of adopting the sequential search. But what if it does go on, wearing the consumer out? At some point agents will decide to cut off the process (this implies that the "reserve price" is not a hard-wired feature of the agent, and it may be adjusted in the process, however strange this may sound). But it sounds very realistic.
Alecos Papadopoulos
CC BY-SA 3.0
2014-11-23T17:38:45.127Z
@AlecosPapadopoulos The best empirical evidence is De Los Santos, which suggests consumers *do not* use sequential search. I expect the reason might be bounded rationality. There are various things you can do to break the usual sequential search model (e.g. finite number of firms so you can run out of options, saying that consumers have to learn about the price distribution, saying that search costs are convex). But still, sequential search will be optimal, only with a reserve price that changes over time.
Ubiquitous
CC BY-SA 3.0
2014-11-23T17:41:01.793Z
@AlecosPapadopoulos For example, one way of modelling consumers getting worn out would be to say that the marginal cost of search is increasing. But then the consumer should use sequential search but increase their reserve price over time. Intuitively, as they get tired of searching it becomes optimal to accept a worse offer. But still, you don't want to commit ex ante to searching $x$ firms there is a change that it will only take $x-1$ searches to find an acceptable offer.
Ubiquitous
CC BY-SA 3.0
2014-11-23T18:08:44.787Z
@Ubiquitous Yes this last framework that you describe is probably the best one: sequential search with increasing marginal disutility/cots from search, which guarantees that the process will eventually stop.
Alecos Papadopoulos
CC BY-SA 3.0
2014-11-23T18:39:52.803Z
@Ubiquitous This paper I think is along these lines: Caplin, A., Dean, M., & Martin, D. (2011). Search and satisficing. The American Economic Review, 2899-2922.
Alecos Papadopoulos
CC BY-SA 3.0
2014-11-23T10:21:08.410Z
2014-11-23T10:21:08.410Z
Ubiquitous
<p>There are a number of online booksellers that are popular in India right now. The prices they charge for the same book often differ by as much as 10% (See this price comparison site to check <a href="http://www.indiabookstore.net/">http://www.indiabookstore.net/</a>)</p>

<p>Since these are homogenous goods and anyone who can access one of the stores can as easily assess another I wonder how we might explain this price dispersion. I have not done a systematic study but it is my impression that it is not the case that there is an ordering of prices between stores which is the same for different books.</p>

<p>I was wondering whether there are any economic models which can explain this dispersion. In particular are there models which can be tested by using panels of price data. </p>

<p>[I confess I am fishing for a research topic.]</p>

<microeconomics><industrial-organisation>
Price dispersion in online retail
Jyotirmoy Bhattacharya
# Price dispersion in online retail

(Asked by: username_0 on 2014-11-23)

There are a number of online booksellers that are popular in India right now. The prices they charge for the same book often differ by as much as 10% (See this price comparison site to check <http://www.indiabookstore.net/>)

Since these are homogenous goods and anyone who can access one of the stores can as easily assess another I wonder how we might explain this price dispersion. I have not done a systematic study but it is my impression that it is not the case that there is an ordering of prices between stores which is the same for different books.

I was wondering whether there are any economic models which can explain this dispersion. In particular are there models which can be tested by using panels of price data.

[I confess I am fishing for a research topic.]

**Tags:** microeconomics, industrial-organisation


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## 1 answers

### Answer by username_1 on 2014-11-23. Score: 9 | Accepted answer

Yes, this has actually been quite an active area for research within the consumer search literature. As a starting point, I would recommend looking at the following:

* **[BAYE, M. R., AND J. MORGAN (2001): “Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets”, *American Economic Review*, 91(2), 454–474.](https://www.aeaweb.org/articles.php?doi=10.1257/aer.91.3.454)** These authors have a model that is interesting because it explains the persistence of price dispersion, even in environments like price comparison sites where one would ordinarily think that all consumers will buy from the lowest-priced merchant. The intuition is closely related to that of [Varian's classic model of sales](http://people.ischool.berkeley.edu/~hal/Papers/model-of-sales.pdf), if you know that. The idea is that some firms price low to sell to the consumers on the price comparison site, whilst others price high to sell to less-informed consumers who do not use the price comparison site and therefore do not compare as many prices.
* **[BAYE, M. R., J. MORGAN AND P. SCHOLTEN (2004): “Price Dispersion in the Small and in the Large: Evidence From an Internet Price Comparison Site”, *Journal of Industrial Economics*, 52(4), 463–496.](http://www.bus.indiana.edu/riharbau/repec/iuk/wpaper/bepp2004-03-baye-morgan-scholten.pdf) (older working paper link).** This is interesting because they test various models (including the one mentioned above) against data from a price comparison site.
* **[De Los Santos, B., A. Hortaçsu, and M. R. Wildenbeest (2012): "Testing Models of Consumer Search Using Data on Web Browsing and Purchasing Behavior." *American Economic Review*, 102(6), 2955-80.](https://www.aeaweb.org/articles.php?doi=10.1257/aer.102.6.2955)** Not directly related to the question, but an interesting take on a similar issue. There are two classic models of consumer search: sequential and fixed-sample. In sequential search, consumers visit a merchant, evaluate its offer and decide whether to search again; repeating his process until they find an offer they are willing to accept. In fixed-sample search consumers first decide the number $n$ of merchants they will visit; they then visit precisely $n$ merchants and buy the best offer among them. Given dispersed prices, sequential search is optimal and the fixed-sample strategy is not. These authors test the two models against data from online retailers and find evidence to suggest that consumers use a strategy closer to the fixed-sample end of the spectrum.

A couple of extra references to finish up:

* **[BAYE, M. R., J. MORGAN AND P. SCHOLTEN (2006): “Information, Search, and Price Dispersion”, in T. HENDERSHOTT (ed.) *Handbook of Economics and Information Systems*, Elsevier Science, 323–371](http://faculty.haas.berkeley.edu/rjmorgan/Information%20Search%20and%20Price%20Dispersion.pdf)** A nice survey of theories of search and price dispersion that can give you an idea of what work has been done on these general phenomena (and possibly some ideas of what can be empirically tested?).
* **[ELLISON, G., AND S. F. ELLISON (2009): “Search, Obfuscation, and Price Elasticities on the Internet”, *Econometrica*, 77(2), 427–452](http://economics.mit.edu/files/7205)** A study of how firms can obfuscate the search process to maintain market power in a frictionless context like a price comparison site. Ellison and Wolitzky also have a nice theoretical paper on this phenomenon in the *RAND Journal of Economics*.

> **Comments:**
> **username_2**: @username_1 (+1). Regarding the "De Los Santos et al" paper, are they also dealing with information costs and uncertainty? Any open-ended algorithm ("continue searching until...") creates uncertainty about the length and the costs of the process. Look at businesses: Most Procurement departments determine a preset fixed number of offers (usually no less than three, rarely more than five) that they will seek to receive in order to decide on a purchase. There is a reason for that.  
> **username_1**: @username_2 Yes, the sequential search model (which is much older than De Los Santos et al.) does take account of these costs. Still, sequential search is optimal. The way it works is that the consumer calculates a reserve price, $r$, such that they would be indifferent between buying at that price and continuing to incur costs of search. They buy as soon as they find a price below $r$. A key result of this literature is that, although the length of the search is uncertain, the reserve price is stationary throughout the whole search process. <Continued below>  
> **username_1**: <continued from above> An intuitive reason why the fixed-sample search is not optimal is this: suppose you decide to search five stores, but the first store is very very cheap. You would then regret having committed yourself to spending time searching four more. Conversely if all of the first five offers are very expensive you would wish that you had planned to search for longer. The sequential search model doesn't suffer this problem because the search horizon changes depending on whether you get an early offer below the reserve price or not.  
> **username_2**: @username_1 Are there empirical evidence that economic agents tend to prefer the sequential search model? Given accumulated experience, consumers would know some "average length" and hence feel some comfort that the process won't go on indefinitely. This works in favor of adopting the sequential search. But what if it does go on, wearing the consumer out? At some point agents will decide to cut off the process (this implies that the "reserve price" is not a hard-wired feature of the agent, and it may be adjusted in the process, however strange this may sound). But it sounds very realistic.  
> **username_1**: @username_2 The best empirical evidence is De Los Santos, which suggests consumers *do not* use sequential search. I expect the reason might be bounded rationality. There are various things you can do to break the usual sequential search model (e.g. finite number of firms so you can run out of options, saying that consumers have to learn about the price distribution, saying that search costs are convex). But still, sequential search will be optimal, only with a reserve price that changes over time.  
> **username_1**: @username_2 For example, one way of modelling consumers getting worn out would be to say that the marginal cost of search is increasing. But then the consumer should use sequential search but increase their reserve price over time. Intuitively, as they get tired of searching it becomes optimal to accept a worse offer. But still, you don't want to commit ex ante to searching $x$ firms there is a change that it will only take $x-1$ searches to find an acceptable offer.  
> **username_2**: @username_1 Yes this last framework that you describe is probably the best one: sequential search with increasing marginal disutility/cots from search, which guarantees that the process will eventually stop.  
> **username_2**: @username_1 This paper I think is along these lines: Caplin, A., Dean, M., & Martin, D. (2011). Search and satisficing. The American Economic Review, 2899-2922.  

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