The Sources of On-Line Price Dispersion Across Product Types: An Integrative View of On-Line Search Costs and Price Premiums

Abstract

This article analyzes the price dispersion for products observed on the Internet and reaffirms the existence of substantial price dispersion across e-tailers. Comparison of advertised vs. unadvertised products reveals that predictions of search theory on advertising effect are generally not confirmed in the Internet market. Comparison of multi-channel vs. pure-play e-tailers reveals that multi-channel retailers with established brands in physical stores command price premiums in most on-line markets but not in very competitive markets like books, CDs, and flight tickets. A model is developed that uses cross-site and in-site search as search cost variables, and range of product options, product description, and product demonstration as Web site service feature variables. It is used to test when search cost variables are more salient than service feature variables, and vice versa. The results show that whether a variable accounts for variance in prices differs from product to product. Some service features enable e-retailers to charge higher prices without losing competitiveness; others do not offer price advantage because they represent lower cost structures that allow e-tailers to charge lower prices to become more competitive.