Information, Search, and Price Dispersion
2006, Handbook in Economics and Information Systems
Michael R. Baye, John Morgan, Patrick Scholten
We provide a unified treatment of alternative models of information acquisition/transmission that have been advanced to rationalize price dispersion in online and offline markets for homogeneous products. These different frameworks -- which include sequential search, fixed sample search, and clearinghouse models -- reveal that reductions in (or the elimination of) consumer search costs need not reduce (or eliminate) price dispersion. Our treatment highlights a duality" between search-theoretic and clearinghouse models of dispersion, and shows how auction-theoretic tools may be used to simplify (and even generalize) existing theoretical results. We conclude with an overview of the burgeoning empirical literature. The empirical evidence suggests that price dispersion in both online and offline markets is sizeable, pervasive, and persistent and does not purely stem from subtle differences in firms' products or services.
Michael R. Baye, John Morgan, and Patrick Scholten, "Information, Search, and Price Dispersion," Chapter 6 in Handbook in Economics and Information Systems Volume 1 (T. Hendershott, Ed.), Amsterdam: Elsevier, 2006.