Equilibrium with Product Differentiation

Perloff, Jeffrey M.; Salop, Steven C.

doi:10.2307/2297473

Cited by 383 publications

(246 citation statements)

References 21 publications

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“…A consumer's preferences determine the location of her ideal product or product mix, and some type of distance metric in the product attribute space is used as a proxy for the utility loss, or "fit" cost, when a consumer is not able to purchase her ideal brand or a perfectly substituting mix of brands. These models highlight the importance of brand attributes (product offerings) and the dynamic aspects of competition through the reformulation of existing brands or through the introduction of new ones (Schmalensee 1978, Perloff andSalop 1985). Diamond (1985) notes that "search theory and empirical work have a long way to go until we have satisfactory answers to a number of allocation questions that are totally ignored in a Walrasian setting.…”

Section: Electronic Marketplaces and Search In Differentiated Marketsmentioning

confidence: 99%

Reducing Buyer Search Costs: Implications for Electronic Marketplaces

1997

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Information systems can serve as intermediaries between the buyers and the sellers in a market, creating an "electronic marketplace" that lowers the buyers' cost to acquire information about seller prices and product offerings. As a result, electronic marketplaces reduce the inefficiencies caused by buyer search costs, in the process reducing the ability of sellers to extract monopolistic profits while increasing the ability of markets to optimally allocate productive resources. This article models the role of buyer search costs in markets with differentiated product offerings. The impact of reducing these search costs is analyzed in the context of an electronic marketplace, and the allocational efficiencies such a reduction can bring to a differentiated market are formalized. The resulting implications for the incentives of buyers, sellers and independent intermediaries to invest in electronic marketplaces are explored. Finally, the possibility to separate price information from product attribute information is introduced, and the implications of designing markets promoting competition along each of these dimensions are discussed.

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Section: Electronic Marketplaces and Search In Differentiated Marketsmentioning

confidence: 99%

Reducing Buyer Search Costs: Implications for Electronic Marketplaces

1997

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“…This lack of differentiation increases the own price elasticity of demand and leads to lower equilibrium prices. Because an increase in own price elasticity lowers the average price of products (Perloff and Salop 1985), it leads to lower levels of price dispersion (Pratt et al 1979, Scott-Morton et al 2001, Gatti and Kattuman 2003. Walsh and Whelan (1999), among others, have adopted the notion of heterogeneous demand elasticity as a key source of price dispersion.…”

Section: Hypothesis 2 (H2) Products With Longer Order Cycle Times Armentioning

confidence: 99%

Using Transaction Prices to Re-Examine Price Dispersion in Electronic Markets

Ghose

Yao

2011

Information Systems Research

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P rice dispersion is an important indicator of market efficiency. Internet-based electronic markets have the potential to reduce transaction and search costs, thereby creating more efficient, "frictionless" markets, as predicted by theories in information economics. However, earlier work has reported significant levels of price dispersion on the Internet, which is in contrast to theoretical predictions. A key feature of the existing stream of work has been its use of posted prices to estimate price dispersion. In theory, this can lead to an overestimation of price dispersion because a sale may not have occurred at the posted price. In this research, we use a unique data set of actual transaction prices collected from both the electronic and offline markets of buyers in a businessto-business market to evaluate the extent of price dispersion. We find that price dispersion in the electronic market is as low as 0.22%, which is substantially less than that reported in the existing literature. This near-zero price dispersion suggests that in some electronic markets the "law of one price" can prevail when we consider transaction prices, instead of posted prices. We further develop a theoretical framework that identifies several new drivers of price dispersion using transaction data. In particular, we focus on four product-level and market-level attributes-product cost, order cycle time, own price elasticity, and transaction quantity, and we estimate their impact on price dispersion. We also examine the electronic market's moderating role in the relationship between these drivers and price dispersion. Finally, we estimate the efficiency gains that accrue from transactions in the relatively friction-free market and find that the electronic market can enhance consumer surplus by as much as $97.92 million per year.

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“…While formally close to the present paper, the product differentiation paper by Perloff and Salop (1985) has a different motivation. Their paper suggests a model with differentiated goods where consumers have heterogeneous preferences over the available products.…”

Section: Related Literaturementioning

confidence: 71%