Consumer Price Search and Platform Design in Internet Commerce
Type:
SIEPR Discussion Paper 13-038
Author(s):
Published:
08/11/14
Abstract:
Search frictions can explain why the "law of one price" fails in retail
markets and why even firms selling commodity products have pricing power. In
online commerce, physical search costs are low, yet price dispersion is common.
We use browsing data from eBay to estimate a model of consumer search and
price competition when retailers offer homogeneous goods. We find that retail
margins are on the order of 10%, and use the model to analyze the design of
search rankings. Our model explains most of the effects of a major re-design
of eBay's product search, and allows us to identify conditions where narrowing
consumer choice sets can be pro-competitive. Finally, we examine a subsequent
A/B experiment run by eBay that illustrates the greater difficulties in designing search algorithms for differentiated products, where price is only one of the
relevant product attributes.
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