An Analysis of Pricing Strategy and Price Dispersion on the Internet

Using prices obtained from shopbots, we test several hypotheses regarding the economics of information and optimal search. We find that price dispersion is positively (negatively) related to product price and the number of sellers in cross-sectional (time series) analysis. Price dispersion increases over time when the sample includes new entrants, but decreases in the absence of entry. Controlling for shipping charges and seller heterogeneity reduces, but does not eliminate, price dispersion. Finally, prices appear to be correlated across products and over time – low price sellers for one product (time period) generally charge low prices for all items (time periods).