Abstract
Internet firms charge a wide range of prices for homogeneous products, and high-priced firms remain high-priced and low-priced firms remain low-priced over long periods. One explanation is that high-price firms are charging a premium for superior service. An alternative, price-dispersion explanation is that firms vary the prices for informed and uniformed consumers (Salop and Stiglitz, 1977) or serious shoppers and others (Wilde and Schwartz, 1979). The pricing pattern for a digital camera and a flatbed scanner is consistent with the price-dispersion model and inconsistent with the service-premium hypothesis.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Arnold, Michael A. (2000) ‘Costly Search, Capacity Constraints, and Bertrand Equilibrium Price Dispersion’, International Economic Review, 41, 117–131.
Bailey, Joseph P. (1998) ‘Intermediation and ElectronicMarkets: Aggregation and Pricing in Internet Commerce’, Ph.D. Dissertation, Technology, Management and Policy, Massachusetts Institute of Technology, Cambridge, MA.
Bakos, J. Yannis (1991) ‘A Strategic Analysis of Electronic Marketplaces’, MIS Quarterly, 295–310.
Bakos, J. Yannis (1997) ‘Reducing Buyer Search Costs: Implications for Electronic Marketplaces’, Management Science, 43, 1676–1692.
Brynjolfsson, Erik, and Michael D. Smith (1999) ‘Frictionless Commerce? A Comparison of Internet and Conventional Retailers’, Working Paper, MIT Sloan School of Management, http://ecommerce.mit.edu/papers/friction Burdett
Kenneth, and Kenneth L. Judd (1983) ‘Equilibrium Price Distributions’, Econometrica, 51, 955–969.
Carlton, Dennis W., and Jeffrey M. Perloff (2000) Modern Industrial Organization, 3rd edn. Reading, MA: Addition Wesley Longman.
Chow, Gregory C. (1967) ‘Technological Change and the Demand for Computers’, American Economic Review, 57, 1117–1130.
Clemons, Eric K., Il-Horn Hann, and Lorin M. Hitt (1998) ‘The Nature of Competition in Electronic Markets: An Empirical Investigation of Online Travel Agent Offering’, Working Paper,Wharton School of the University of Pennsylvania.
Conlisk, John, Eitan Gerstner, and Joel Sobel (1984) ‘Cyclic Pricing by a Durable Goods Monopolist’, Quarterly Journal of Economics, 99, 489–505.
Dana Jr., James D. (1999) ‘Equilibrium Price Dispersion under Demand Uncertainty: The Roles of Costly Capacity and Market Structure’, Rand Journal of Economics, 30, 632–660.
Davis, Douglas D., and Charles A. Holt (1996) ‘Consumer Search Costs and Market Performance’, Economic Inquiry, 34, 133–151.
Diamond, Peter (1971) ‘A Model of Price Adjustment’, Journal of Economic Theory, 3, 156–168.
Grilliches, Zvi (1961) ‘Hedonic Price Indexes for Automobiles: An Econometrics Analysis of Quality Change’, Reprinted in Z. Grilliches, ed., Price Indexes and Quality Change: Studies in New Methods of Measurement. Cambridge, MA: Harvard University Press, pp. 55–87.
Perloff, Jeffrey M., and Steven C. Salop (1986) ‘Firm-Specific Information, Product Differentiation, and Industry Equilibrium’, Oxford Economic Papers, 38(Suppl.), 184–202.
Reisz, Peter C. (1979) ‘Price-Quality Correlations for Packaged Food Products’, Journal of Consumer Affairs, 13, 237–247.
Salop, Steven C. (1977) ‘The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination’, The Review of Economic Studies, 44, 393–406.
Salop, Steven C., and Joseph E. Stiglitz (1977) ‘Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion’, The Review of Economic Studies, 44, 493–510.
Salop, Steven C., and Joseph E. Stiglitz (1982) ‘The Theory of Sales: A Simple Model of Price Dispersion with Identical Agents’, American Economic Review, 72, 1121–1130.
Shilony, Yuval (1977) ‘Mixed Pricing in Oligopoly’, Journal of Economic Theory, 14, 373–388.
Smith, Michael D., Joseph Bailey, and Erik Brynjolfsson (1999) ‘Understanding Digital Markets: Review and Assessment’, in Erik Brynjolfsson and Brian Kahin, eds., Understanding the Digital Economy. Cambridge, MA: MIT Press.
Sobel, Joel (1984) ‘The Timing of Sales’, Review of Economic Studies, 51, 353–68.
Sorenson, Alan, T. (1998) ‘Equilibrium Price Dispersion in Retail Market for Prescription Drugs’, MIT Working Paper.
Stahl, Dale O. (1989) ‘Oligopolistic Pricing with Sequential Consumer Search’, American Economic Review, 79, 700–712.
Stahl, Dale O. (1996) ‘Oligopolistic Pricing with Heterogeneous Consumer Search’, International Journal of Industrial Organization, 14, 243–268.
Stokey, Nancy L. (1979) ‘Intertemporal Price Discrimination’, Quarterly Journal of Economics, 93, 355–371.
Stokey, Nancy L. (1981) ‘Rational Expectations and Durable Goods Pricing’, Bell Journal of Economics and Management Science, 12, 112–128.
Varian, Hal R. (1980) ‘A Model of Sales’, American Economic Review, 70, 651–659.
Varian, Hal, R. (1999) ‘Market Structure in the Network Age’, Paper for Understanding the Digital Economy Conference, Department of Commerce, Washington, D.C., May 25–26.
Wilde, Louis L., and A. Schwartz (1979) ‘Equilibrium Comparison Shopping’, Review of Economics Studies, 46, 543–554.
Yamada, Yoshiko, and Norleen Ackerman (1984) ‘Price-Quality Correlations in the Japanese Market’, Journal of Consumer Affairs, 18, 251–265.
Zettlemeyer, Florian (1998) ‘The Strategic Use of Consumer Search Cost’, Haas Business School, University of California, Berkeley Working Paper.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Baylis, K., Perloff, J.M. Price Dispersion on the Internet: Good Firms and Bad Firms. Review of Industrial Organization 21, 305–324 (2002). https://doi.org/10.1023/A:1020415304514
Issue Date:
DOI: https://doi.org/10.1023/A:1020415304514