Can price dispersion be persistent in the Internet markets?

Abstract

We investigate pricing behaviour and market dynamics for both online branches of Multi-Channel Retailers (MCRs) and online-only retailers (Dotcoms), based on a set of panel data collected for 2 years in the online DVD market. We find that prices of MCRs and Dotcoms both go down with time, but prices of MCRs decrease in a significantly faster speed, implying that difference in the average prices between the two types of retailers is getting smaller with time. We also compare the price dispersion and its dynamics between MCRs and Dotcoms. We find that the price dispersion among MCRs is much bigger than that among Dotcoms at the beginning. But such a difference gets smaller with time as the price dispersion among Dotcoms becomes bigger. Our results suggest that the two types of retailers will not only charge similar average prices in long term, but also have similar price dispersions. But our findings show that price dispersion among all retailers goes up with time, indicating that prices do not converge in the Internet market. Branding makes significant difference on both the price and the price dispersion.

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