Price Dispersion With the meteoric Term Paper

Price Dispersion

With the meteoric rise of online shopping websites and their pervasive use of pricing as the primary differentiator on the more commodoitized products sold over the Internet, and the second factor being the pervasive access to the Internet, the assumption is that price dispersion would naturally occur. This in fact has actually not been the case, with price increases being driven online through the use of intensive branding and the accentuating of price-quality relationships in online retailers. These online retailers are at times charging more than their brick-and-mortar competitors, according to Clemons, Hann and Hitt (2002) and Brynjolfsson and Smith, (2000).

Others have argued that as online markets mature and become even more commodoitized, price dispersion will be less likely to occur and will stabilize.

Price dispersion assumes that the Internet itself and its access can normalize prices over time. In fact, the opposite is true, as online retailers are continually learning how to target and sell to specific audiences who are willing to pay a price premium. Consumers are willing to pay these premiums due to the actual or perceived retailer quality, and the convenience factor of finding an online retailer who can be trusted to deliver the products at the time promised, in excellent condition. in electronics is an example of a retailer who charges more than some retail storefronts for flat-panel televisions for example and sells thousands of units a month based on the implicit trust consumers have with them.

Search costs and the opportunity costs of learning about additional retailers online also are forcing less price dispersion, as many online purchasers have incomplete information on all retailers. Even the pricing and product aggregation sites that provide price and availability comparisons across online retailers are often incomplete. The fact is that price dispersion assumes perfect market knowledge which is nearly impossible across all sites of the Internet, some relatively unknown.

The impacts of price dispersion on market structure is dependent on buyers’ levels of awareness of alternative sources of products, and ironically price dispersion increase as search costs decrease. That’s because consumers are spending less time, becoming more efficient if you will, on pricing comparisons.

Yet as more sites become known and pricing dispersion begins to take hold on specific goods, online retailers are also becoming more adept at analyzing who is visiting, purchasing from, and shopping their websites on pricing alone. The counterbalancing effect of online retailers gaining greater expertise in analyzing and marketing to their customers leads to greater pricing execution, pricing enforcement, and pricing optimization throughout their customer bases served online. Pricing execution occurs when a shopper for a specific product, who has price-shopped the site before, gets a % off coupon on the pop-up window or any other form of incentive. Pricing enforcement also has a specific effect on price dispersion in that it inhibits retailers who are part of a broader retailing group to deviate from pricing standards. Finally, pricing optimization predominantly occurs in the services industries including airlines, where a product, for example an airline seat, as the departure date nears, gets more valuable. uses price optimization for example for all airlines and offerings.

The net effect of pricing execution, enforcement, and optimization on price dispersion is counter to the hypothesis that the Internet would tend to normalize and disperse price. Yet in fact the opposite is true, as search costs plummet and retailers learn more about how to tailor pricing in real-time to the characteristics of online customers, price dispersion is curtailed and differentiation through actual or perceived value of retailers and their ability to invoke pricing strategies is increased.


Brynjolsson, E. And M. Smith. 2000. “Frictionless Commerce? A Comparison of Internet and Conventional Retailers.” Management Science, 46(4): 563-585.

Clemons, E., I. Hann, and L. Hitt. 2002. “The Nature of Competition in Electronic Markets: An Empirical Investigation of Online Travel Agent Offerings.” Management Science, 48(4): 534-549.

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