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 of an item with the same measured characteristics across sellers at a given point in time for identical products sold by e-tailers online should be smaller than it is offline, but some recent empirical evidence reveals the opposite. Based on an empirical analysis of 105 e-tailers comprising 6,739 price observations for 581 items in eight product categories, the authors show that online price dispersion is persistent, even after controlling for e-tailer heterogeneity. The general conclusion is that the proportion of the price dispersion explained by e-tailer characteristics is small. Also, after controlling for differences in e-tailer service quality, prices at pure-play e-tailers are equal to or lower than those at bricks-andclicks e-tailers for all categories except books and computer software.

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