Department of Economics

PRICE DISPERSION IN ONLINE MARKETS: THE CASE OF COLLEGE TEXTBOOKS

Department of Economics

University of Delaware

Working Paper #2003-02

PRICE DISPERSION IN ONLINE MARKETS: THE CASE OF COLLEGE TEXTBOOKS

Michael A. Arnold and Christine Saliba

ABSTRACT

In his seminal work, Stigler (1961) argued that price dispersion for a homogeneous product is an indication of consumer ignorance. Ready access to price information on the Internet has led to many claims that ignorance will not persist in online markets, and that online prices for a homogenous good will converge to the competitive price. However, a growing body of empirical research provides strong evidence of persistent price dispersion in online markets. In this paper we present a simple model which illustrates how price dispersion can exist in equilibrium even when all consumers are perfectly informed about the prices charged by all firms. The equilibrium relies on the fact that although prices are common knowledge, information about the availability of the product at any particular firm can only be obtained at a positive cost.  We test the model using data from the online market for college textbooks. The empirical results indicate that price dispersion exists in the online market for college textbooks, and support the predictions of the theoretical model that in a equilibrium with price dispersion some firms adopt a high-price, high-availability strategy while others adopt a low-price, low-availability strategy.

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