price dispersion

Abstract

A brief survey of the economics of price dispersion, written for the New Pal-grave Dictionary of Economics, 2nd Edition. Journal of Economic Literature classification numbers: C72, D43, D82, D83. Price dispersion occurs when different sellers offer different prices for the same good in a given market. Thus, it differs from price discrimination under which a single seller offers different prices to different groups of buyers or in different geographical locations. A simple explanation for price dispersion is that it arises from imperfect information on the part of consumers who do not all buy from the lowest price seller because some at least do not know who the lowest priced seller is. It is an important topic in the field of the economics of information in that there is considerable empirical evidence that price dispersion is widespread and significant. Yet, it has proven surprisingly difficult for economists to derive satisfactory models that support price dispersion as an equilibrium phenomenon. The rise of electronic commerce at the end of the 20th century gave new impetus to empirical studies of pricing behaviour. Baye et al. (2004) analyse detailed information on prices of 1000 items collected from a price comparison site. Price dispersion is found to be significant and persistent. Baye et al. finds the an average coefficient of variation of about 9% for goods being sold online. This is comparable with the results of Lach (2002) for conventional retailers who finds a lower coefficient for the price of refrigerators, but higher variation for grocery items such as coffee or flour.