Price Setting and Price Discovery Strategies with a Mix of Frequent and Infrequent Internet Users

32 Pages Posted: 19 Jan 2005 Last revised: 9 Jan 2018

See all articles by Suman Banerjee

Suman Banerjee

Stevens Institute of Technology; Stevens Institute of Technology

Amiya Chakravarty

Tulane University - Management Area

Date Written: April 15, 2016

Abstract

In this paper we develop an analytical model that characterizes the structure of price dispersion observed in electronic markets. Findings of our model are consistent with empirical evidence in these e-markets. We show that when different types of buyers' have different search costs, firms follow noncompetitive pricing strategies. Also, our model shows that price dispersion may actually increase if search costs falls, challenging the common belief that price dispersion decreases as search costs fall. We derive multiple price dispersion equilibria, with differing levels of welfare implications. These results are generated without the need for assumption of asymmetric information, and heterogeneity amongst buyers and/or firms. Our results show that the process of search alone may generate price dispersion, and highlight the importance of processes of search not only on prices, but also on the efficiency of e-markets.

Keywords: Price dispersion, e-commerce, search costs

JEL Classification: D83, L11, L12, L15, L22

Suggested Citation

Banerjee, Suman and Chakravarty, Amiya, Price Setting and Price Discovery Strategies with a Mix of Frequent and Infrequent Internet Users (April 15, 2016). Stevens Institute of Technology School of Business Research Paper, Available at SSRN: https://ssrn.com/abstract=650706 or http://dx.doi.org/10.2139/ssrn.650706

Suman Banerjee (Contact Author)

Stevens Institute of Technology ( email )

525 River Street
Hoboken, NJ 07030
United States
2012613689 (Phone)

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

Amiya Chakravarty

Tulane University - Management Area ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States
504-865-5312 (Phone)
504-865-6751 (Fax)

HOME PAGE: http://www.tulane.edu/~akc/amiya.html

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