An Examination of Price Dispersion in an Online Retail Marketplace

Abstract

This dissertation is a compilation of three essays that analyze price dispersion in an online retail marketplace. Price dispersion is a measure of the variation in prices that sellers charge for products. Online price dispersion has been thoroughly analyzed in the past decade as it has numerous implications for firm pricing strategy as well as consumer welfare. Chapter 1 of this dissertation offers a literature review of price dispersion research, and discusses key explanations as to why this phenomenon exists on the web. Also, a literature review of shop-bots is presented as they are similar to online marketplaces and form the basis of the three studies. Chapter 2 is the first study, and it establishes the existence of price dispersion in online marketplaces and offers a comparison with price dispersion in shop-bots. It is determined that online marketplaces may have less variation than on shop-bots, yet the price dispersion is still high. Chapter 3 is the second study and it explains much of the dispersion found in the online marketplace through differences in seller service quality and seller reputation. A seller's reputation was found to be the key contributor to variation in the online marketplace hence, study 3, which is chapter 4 of this dissertation, employs an experimental approach designed to offer a perspective of buyers and sellers to determine why price varies with reputation and if consumers value the reputation score. It was determined that buyers prefer sellers with strong long run reputation scores more than sellers with strong short-term reputation scores. Based on these reputation scores sellers want to try to offer a higher price than consumers are willing to pay, and sellers think that a strong score conveys higher levels of trust than buyers believe. This mismatch between how sellers think consumers respond, and how the consumers actually respond could be another driver of price dispersion online. A discussion of the implications of these research studies is offered in Chapter 5.