Comparing Price Dispersion on and off the Internet Using Airline Transaction Data

Abstract

The internet presumably reduces search costs and creates an “efficient” market. Prior research quantifying the dispersion in the electronic market, however, has yielded mixed results. Some recent research has documented very low levels of dispersion in internet attributing it to the use of transaction prices as opposed to posted prices. We revisit this issue using contemporaneous online and offline transaction data for airline tickets including ticket characteristics and medium of sale permitting comparison of online versus offline price dispersion. We find evidence of significantly lower price dispersion on the internet compared to offline market, though some positive dispersion still persists.