Search, Obfuscation, and Price Elasticities on the Internet

This work examines the competition between a group of Internet retailers that operate in an environment where a price search engine plays a dominant role and discusses several models of obfuscation and examines its effects on demand and markups empirically.

Abstract

We examine the competition between a group of Internet retailers that operate in an environment where a price search engine plays a dominant role. We show that for some products in this environment, the easy price search makes demand tremendously price-sensitive. Retailers, though, engage in obfuscation - practices that frustrate consumer search or make it less damaging to firms - resulting in much less price sensitivity on some other products. We discuss several models of obfuscation and examine its effects on demand and markups empirically. Observed markups are adequate to allow efficient online retailers to survive.