PRICE DISPERSION AND COMPETITION WITH DIFFERENTIATED SELLERS*

I measure price dispersion among differentiated retail gasoline sellers and study the relationship between dispersion and the local competitive environment. Significant price dispersion exists even after controlling for differences in station characteristics, and price differences between sellers change frequently. The extent of price dispersion is related to the density of local competition, but this relationship varies significantly depending on the type of seller and the composition of its competitors. These findings are consistent with interactions between seller and consumer heterogeneity that are not well understood in the existing price dispersion literature.     

Shopping for Information: Implications of Consumer Learning for Optimal Pricing and Product Design*

I study a seller's pricing problem where consumers perform costly product research about value before purchase. They buy the product when sufficiently optimistic about value and cease research when sufficiently pessimistic. I find that the seller encourages product research when prior belief about value is high, even though he could sell immediately for a high price. The prior affects both expected value and how additional information changes consumers' beliefs. I show that an increase in research cost affects equilibrium price nonmonotonically. Finally, when the seller chooses price and product value dispersion, the optimal level of dispersion need not be extremal.     

Missing Price Information and Its Impact on Equilibrium Price Dispersion: Evidence From Gasoline Signboards*

This article seeks to quantify the importance of price information in reducing consumer search costs and equilibrium price dispersion in a competitive setting. It exploits a natural experiment in the retail gasoline industry in which stations post the prices of only certain grades of gasoline on large street-side signboards, and not others, except where required by law. Differential-by-grade signboard information predicts a specific curvature in price dispersion across grades, and differentiates itself from other noninformational factors such as income and cost. The impact of readily-available price information on search and price dispersion is found to be exceptionally large.     

Price Strategies for Idiosyncratic Goods—The Case of Housing

We determine the mechanism that a rational, profit-maximizing seller would use to revise his reservation price for a heterogeneous or infrequently exchanged good. For instance, while one dimension of a home's quality may be easily determined in competitive markets (e.g., the valuation of floor size, location, etc.), other dimensions of quality may be idiosyncratic (unit specific) and unobservable by the seller (e.g., aesthetics of the home). Here, a seller of a new or infrequently exchanged housing unit may use sales success information to revise his expectation of the unit's market-determined value and hence revise his reservation price. The rational seller will, upon arrival of the first buyer inspecting the unit, determine a sequence of reservation prices for this and expected subsequent buyers. This price sequence falls for subsequent buyers and starts from a lower initial price if the first buyer arrives later than expected. Through this mechanism, we offer an explanation for price dispersion and vacancy durations in housing markets. While we explicitly model the real estate market here, this price revision mechanism is also applicable to rental markets, labor markets, used car markets, and other markets characterized by heterogeneity and infrequent sales.     

Search Costs and Price Dispersion in a Localized,Homogeneous Product Market: Some Empirical Evidence

Convenience stores provide an opportunity to compare the price dispersion that occurs for gasoline, which is characterized by relatively low search and information costs to consumers, with that of in-store items, which are characterized by relatively high search and information costs to consumers. The results obtained from this study support the hypothesis that differences in search and information costs for consumers play a significant role in explaining the observed price dispersion that occurs for homogeneous items sold at convenience stores.     

A Simple Search and Bargaining Model of Real Estate Markets

This paper examines the impact of brokers on buyers' and sellers' search behavior and on the transaction prices in real estate markets. It is shown that the seller and the buyer search less intensively if the house is listed with a broker. The seller gets a higher price when he employs a broker, but the increase in price is smaller than the commission fee. More specifically, the portion of the commission covered by the increase in price is directly related to the bargaining powers of the buyer and the seller. In the special case where the price is determined according to the Nash bargaining solution, the increase in price is shown to be half of the commission fee. It is also shown that an increase in the commission rate increases the equilibrium price but decreases the equilibrium search intensities.     

Consumer Search in Retail Gasoline Markets

This paper develops direct tests for search behavior in retail gasoline markets. We exploit a unique market‐level dataset that allows us to directly measure search intensity with daily web traffic data from a gasoline price reporting website and perfectly measure daily changes in price levels and dispersion. Our simple yet powerful tests provide strong evidence of both cross‐sectional and intertemporal price search.     

Price Dispersion and Price Discrimination: Empirical Evidence from a Spot Market for Water

This note shows the existence of price dispersion and pricediscrimination in a spot market for water.Several behaviors contributing to this dispersion/discrimination arefound for both the seller and buyer in this relatively competitive market,and examples are given of each. Using some previous theoretical work,the common thread linking the differing behaviors is shown to bediffering levels of information and search costs.     

Price dispersion and seller heterogeneity in retail food markets

Price dispersion, i.e. a homogeneous product being sold at different prices by different sellers, is among the most replicated findings in empirical economics. The paper assesses the extent and determinants of spatial price dispersion for 14 perfectly homogeneous food products in more than 400 retailers in a market characterized by the persistence of a large number of relatively small traditional food stores, alongside large supermarkets. The extent of observed price dispersion is quite high. When prices in an urban area (where the spatial concentration of sellers is higher) are compared with those in smaller towns and rural areas, differences in search costs and the potentially higher degree of competition do not yield lower prices. Other counteracting factors, including differences in seller costs and consumer incomes, make prices, on average, higher in the urban area for 11 of the 14 products considered. For many, but not all, the products supermarkets proved to be less expensive than traditional retailers, although average savings from food shopping at supermarkets were extremely low. Finally, the results of the study provide evidence that retailers have different pricing strategies and these differences also emerge for supermarkets belonging to the same chain. The results presented in the paper suggest that a variety of factors play a role in explaining price dispersion. In addition to differences in seller costs, the contemporaneous heterogeneity of retailers (in terms of services provided) and consumers (in terms of search costs and preferences) makes the emergence of monopolistic competition possible as well as allowing small traditional food retailers to remain in business.     

Pricing behavior in United States manufacturing industries: A statistical study using disaggregated data

We investigate the relationship between industrial market structure and price flexibility (the administered-pricing hypothesis) across United States manufacturing industries by embedding market-structure variables in a model relating relative price variability (dispersion) and inflation. While we find support for a positive relationship between variability and inflation, we do not find that high seller concentration lessens the impact of inflation on price variability. We do find that the larger the efficient-sized plant, the lower the impact of inflation on variability. We also find strong effects of input prices and degree of product durability on relative price variability.     

The Strategic Role of Listing Price in Marketing Real Estate: Theory and Evidence

The seller of a real estate property and his broker have two primary goals: to sell the properly for as high a price as possible and as quickly as possible. While these are separate objectives, they are closely related through the listing price of the seller. The listing price affects how long it takes to find a buyer (i.e., Time On the Market = TOM), and TOM influences the price that results from the bargaining between the seller and the buyer. This leaves the seller and his agent with an important question: What is the optimal price to be asked for the property? The objective of this research is to provide a theoretical and empirical analysis of the impact of listing price on TOM and the transaction price.     

Warranty,Seller Reputation,and Buyer Experience: Evidence From EBAY Used Car Auctions

Using data from the eBay car auction market, we test several predictions regarding warranties, seller reputation and buyer experience in the determination of the final price. We find that the presence of a warranty generates a price premium, but that its magnitude decreases when the seller has a more established reputation. Compared to private sellers, professional dealers, who are ‘repeated‐game players’ in the market, benefit less from a warranty and its substitutability for seller reputation is relatively small. In addition, a buyer with greater experience tends to pay less for a warranty or for a professional dealership.     

Price Competition and Market Segmentation in Retail Gasoline: New Evidence from South Korea

I examine price dispersion in retail gasoline and focus on differentiation along the service dimension: full service versus self service. Consistent with more intensive search by self-service customers, I find that price dispersion always decreases with the number of nearby self-service stations, but does not decrease with the number of nearby full-service stations. When I segment the market by brand, I observe that the estimates are sensitive to how brands are separated into different types. These findings show that the market is more clearly segmented by service level than by brand type and also highlight the importance of product differentiation when modeling price dispersion.     

Optimal reserve prices in sealed-bid auctions with reference effects

The reference effect and loss aversion are incorporated into the buyer’s utility in the symmetric independent private value models of sealed-bid auctions. The buyer’s equilibrium bidding strategy and the seller’s optimal reserve price are derived for the first-price and second-price sealed-bid auctions. In both auction mechanisms, the seller’s optimal reserve price and expected revenue are increasing in the reference point. We compare the seller’s expected revenues as well as the optimal reserve prices in the two auctions. The results show that the seller will set a higher optimal reserve price but obtain lower optimal expected revenue in the second-price auction compared to the first-price auction. Further, we extend the model to the gain-seeking case, and endogenize the reference point as the ex-ante expected price of the item in equilibrium. In contrast to the loss-averse case, the seller will set a lower optimal reserve price but obtain higher optimal expected revenue in the second-price auction compared to the first-price auction if the buyers are gain-seeking. With an endogenous reference point, similar results are obtained in terms of revenue comparison between the two auctions.     

Search, Bargaining and Optimal Asking Prices

This paper analyzes a search-and-bargaining model in which the asking price influences the rate at which potential customers arrive to inspect the seller's house, and the buyer's valuation of the asset is not learned until after the seller makes his initial offer (the asking price). The optimal asking and reservation prices are characterized, and the existence of a subgame-perfect equilibrium asking-price—reservation-price strategy is established. Comparative-statics analysis illustrates how seller and buyer discount rates and the buyer's outside opportunity affect the optimal reservation and asking prices.     

Durability Versus Concentration as an Explanation for Price Inflexibility

We document the extent of price rigidity across United States manufacturing industries in the 1980s and early 1990s and compare rigidity across different phases of the business cycle. We measure price rigidity in three ways – each under four different sets of assumptions. We take an approach that relies on disaggregated data; we look at price patterns for over 4000 individual manufactured commodities. Both durability and seller concentration are found to be important factors explaining differences in price rigidity across industrial product classes. Using our data, we replicate the regression results found in Carlton (1986) that were based on actual transaction prices from the 1960s.     

Optimal mechanisms for an auction mediator

We consider a dynamic auction environment with a long-lived seller and short-lived buyers mediated by a third party. A mediator has incomplete information about traders’ values and selects an auction mechanism to maximize her expected revenue. We characterize mediator-optimal mechanisms and show that an optimal mechanism has a simple implementation as a Vickrey auction with a reserve price where the seller pays to the mediator only a fixed percentage from the closing price.     

Secret reserve prices in first-price auctions

This article offers a theoretical explanation for the use of secret reserve prices in auctions. I study first-price auctions with and without secret reserve price in an independent private values environment with risk-neutral buyers and a seller who cares at least minimally about risk. The seller can fix the auction rules either before or after she learns her reservation value. Fixing the rules early and keeping the right to set a secret reserve price can be strictly optimal. Moreover, I describe the relation of using a secret reserve price to phantom bidding and non-commitment to sell.     

A Dynamic Model of Auctions with Buy‐It‐Now: Theory and Evidence

In the ascending‐price auctions with Yahoo!‐type buy‐it‐now (BIN), we characterize and derive the closed‐form solution for the optimal bidding strategy of the bidders and the optimal BIN price of the seller when they are both risk‐averse. The seller is shown to be strictly better off with the BIN option, while the bidders are better off only when their valuation is high enough. The theory also implies that the expected transaction price is higher in an auction with an optimal BIN price than one without a BIN option. This prediction is confirmed by our data collected from Taiwan's Yahoo! auctions.     

WHEN DO CONSUMERS SEARCH?*

This paper provides empirical evidence relating search to price movements. We measure consumer search directly from traffic statistics for web sites that report gasoline prices. We show empirically that consumers search more as prices rise than they do when prices fall. Asymmetric search patterns have consequences for price behavior. Our findings indicate that retail margins are squeezed by increased search. In addition, we show that there is more price dispersion when prices are falling than when prices are either stable or rising. Our results provide a search‐based explanation for the ‘rockets and feathers’ phenomenon of asymmetric price adjustment.