The growth of Internet price search tools, notably shopbots, has reduced consumers’
search costs for price and some product characteristics. While a variety of analytic
models predict that increased consumer search through shopbots will lower price levels
among competing retailers, there is no consensus in the empirical literature as to whether
price dispersion will increase or decrease in response to increased consumer search
through shopbots. Moreover, there are no papers that have empirically tested these
predictions using direct observation of variation in shopbot use over time.
This paper examines the impact of changes in shopbot use over time on pricing behavior
in the Internet book market. Using price data obtained from a leading shopbot, combined
with clickstream data on shopbot usage from August 1999 to July 2001, we show that an
increase of 1% in shopbot use is correlated with a $0.41 decrease in price levels, after
controlling for product and market characteristics. We also show that price dispersion
decreases with shopbot use in a non-linear fashion. These findings are robust to
controlling for potential simultaneity bias and the possible influence of prominent
retailers, bestsellers, seasonality, and structural changes in the online book industr