Can Price Dispersion in Online Markets Be Explained By Differences in E-Tailer Service Quality?

It has been hypothesized that the Internet lowers search costs and that electronic markets are more competitive than conventional markets. As a result, price dispersion (defined as the distribution of prices of an item with the same measured characteristics across sellers) is expected to be absent from these markets. However, contrary to this expectation, researchers have found that price dispersion in electronic markets is substantial and no narrower than in conventional markets. The observed price dispersion could be due to differences in the services offered by different e-tailers, or to the fact that electronic markets may not be more information-efficient and competitive than conventional markets. This study examined 6,739 price quotes from 105 e-tailers for 581 items in eight product categories and tested if retailer heterogeneity explains online price dispersion. The general conclusion is that the proportion of the price dispersion explained by heterogeneity in e-tailer is small, and that substantial amounts of price dispersion remain after correcting for the influence of e-tailer services. In other words, online price dispersion is persistent even after controlling for e-tailers' service heterogeneity. Evidence still indicates that electronic markets are not necessarily information-efficient. There are apparently gains associated with search for those who do not already know what the best deal is