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Price Dispersion on the Internet: A Further Review and Discussion
Abstract
The emergence and explosive growth of e-commerce have ushered in a new era of retail business, which has in turned triggered an increased research interest in studying online pricing behavior. Online retailing promises the potentials of low barrier of entry, easy access of information, and low transactions costs. These features of online retailing imply that the growth of e-commerce has the potential of realizing often stated economic ideals for a truly competitive market: low search costs, fierce price reactions, low margins, and weak market power. Such benefits might provide significant welfare benefits to consumers. Early studies in the literature mainly focused on comparing price levels and price dispersion between offline and online competitors (e.g. Bailey 1998, Brynjolffson & Smith 2000). As online markets become more mature and more data on e-tailing become available, empirical studies have shifted from analyzing cross-sectional data to longitudinally investigating market dynamics in terms of price levels and price dispersions. Since customers can obtain price information in online markets easily and inexpensively, it might be expected that online price dispersion should be small. However, empirical studies have found significant price differences and persistent price dispersions in the Internet markets, for which we are going to review in the following sections.
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