Can Price Dispersion in Online Markets be Explained by Differences in e-Tailer Service Quality?

Abstract

It has been hypothesized that the online medium and the Internet lower search costs and that electronic markets are more competitive than conventional markets. This suggests that price dispersion - the distribution of prices of an item indicated by measures such as range and standard deviation - of an item with the same measured characteristics across sellers of the item at a given point in time for identical products sold by e-tailers online (on the Internet) should be smaller than it is offline, but some recent empirical evidence reveals the opposite. A study by Smith et al. (2000) speculates that this is due to heterogeneity among e-tailers in such factors as shopping convenience and consumer awareness. Based on an empirical analysis of 105 e-tailers comprising 6739 price observations for 581 items in eight product categories, we show that online price dispersion is persistent, even after controlling for e-tailer heterogeneity. Our general conclusion is that the proportion of the price dispersion explained by e-tailer characteristics is small. This evidence is contrary to the hypothesis that search costs in online markets are low, or that online markets are highly competitive. The results also show that after controlling for differences in e-tailer service quality, prices at pure play e-tailers are equal to or lower than those at bricks-and-clicks e-tailers for all categories except books and computer software.