Price dispersion

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In economics, price dispersion is variation in prices across sellers of the same item, holding fixed the item's characteristics. Price dispersion can be viewed as a measure of trading frictions (or, tautologically, as a violation of the law of one price). It is often attributed to consumer search costs or unmeasured attributes (such as the reputation) of the retailing outlets involved. There is a difference between price dispersion and price discrimination. The latter concept involves a single provider charging different prices to different customers for an identical good. Price dispersion, on the other hand, is best thought of as the outcome of many firms potentially charging different prices, where customers of one firm find it difficult to patronize (or are perhaps unaware of) other firms due to the existence of search costs.

Price dispersion measures include the range of prices, the percentage difference of highest and lowest price, the standard deviation of the price distribution, the variance of the price distribution, and the coefficient of variation of the price distribution.

In most theoretical literature, price dispersion is argued as result from spatial difference and the existence of significant search cost. With the development of internet and shopping agent programs, conventional wisdom tells that price dispersion should be alleviated and may eventually disappear in the online market due to the reduced search cost for both price and product features. However, recent studies found a surprisingly high level of price dispersion online, even for standardized items such as books, CDs and DVDs. There is some evidence of a shrinking of this online price dispersion, but it remains significant. Recently, work has also been done in the area of e-commerce, specifically the Semantic Web, and its effects on price dispersion.

Hal Varian, an economist at U. C. Berkeley, argued in a 1980 article that price dispersion may be an intentional marketing technique to encourage shoppers to explore their options.[1]

A related concept is that of wage dispersion.

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References[edit]

  1. ^ Varian, Hal R., "A Model of Sales" (Sep., 1980), The American Economic Review, Vol. 70, No. 4 , pp. 651-659.
  • Dahlby, Bev and Douglas West, (1986), "Price Dispersion in an Automobile Market," Journal of Political Economy, 94(2): 418-438.
  • Venkatesh Shankar, Xing Pan, and Brian T. Ratchford, (2002), "Do Drivers of Online Price Dispersion Change as Online Markets Grow?," working paper, December, University of Maryland.
  • Cooper, Sean, "Why You Can't Get iPods At a Discount", Slate.
  • Gupta, Tanya, and Abir Qasem,(2002), "Reduction of Price Dispersion through Semantic E-commerce," (in Workshop at WWW2002 International Workshop on the Semantic Web, Hawaii, May 7, 2002)
  • Thiel, Stuart E., "A New Model of Persistent Retail Price Dispersion" (July 6, 2005). Available at SSRN: http://ssrn.com/abstract=757357