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Search and Product Differentiation at an Internet Shopbot

journal contribution
posted on 01.01.2004 by Erik Brynjolfsson, Astrid A. Dick, Michael Smith
Price dispersion among commodity goods is typically attributed to consumer search costs. This paper explores the magnitude of consumer search benefits and costs using a data set obtained from a major Internet shopbot. For the median consumer, the benefits to searching lower screens are $6.55 while the cost of an exhaustive search of the offers is a maximum of $6.45. This paper also estimates price elasticities and find that they are relatively high compared to offline markets, with a decrease in demand of 7 to 10 percent for each percentage increase in price, in the base model. Interestingly, in this setting, consumers who search more intensively are less price sensitive than other consumers, reflecting their increased weight on retailer differentiation in delivery time and reliability. The results demonstrate that even in this nearly-perfect market of the shopbot, substantial price dispersion can exist in equilibrium from consumers preferences over both price and non-price attributes.