Seller Reputation, Buyer Informativeness and Trust in the Market — How does the Healthiness of an Online Market influence Price Dispersion

Most previous studies in price dispersion literature consider only the dispersion of post price. We build a model combining price dispersion with the associated sales, incorporating the dynamic update of online reputation in an Internet market. We identify buyer informativeness, which measures how likely a buyer is able to search and compare multiple offers, as one essential drive of online price dispersion. We also find that both the seller side behavior (different reputation levels, as well as differences in how they value being a high-reputation seller) and the market side factor (how healthy an internet market is) impact the degree of price dispersion. We argue that a healthy internet market builds trust among informed buyers, who are then willing to buy from new sellers with low reputation levels. This gives incentives to new, low-reputation sellers to offer lower prices to generate sales and grow into a high-reputation seller. As a result, price dispersion is different among sellers with different reputation levels, and at different stages in the growth of the Internet market