Pricing and price dispersion in E-commerce

International audienceCompetition on electronic markets will result in lower price level and price dispersion. Such a view is commonly expressed in the literature of electronic commerce. It is justified by the fact that lower search costs by consumers and free entry for firms will foster price competition amongst firms. This paper tries to mitigate a bit this idea by looking at the influence of information and competition on prices of a homogeneous good. In this paper, we analyze the possible driver of price dispersion. We show in a first step that one important driver of price dispersion is the firm's ability to segregate consumers in two classes. One class is captive to a firm and is composed by uninformed consumers or informed consumers which are non-price sensitive. The other claiss is the market common to all firms and is compsed of informed and price sensitive consumers. Second, the existence of a captive market induces price dispersion. In addition when the common market of informed and price sensitive consumers sample k firms randomly (i.e. use each a personal shopbot of power k), then the mean price is higher when either the share of captive consumers is higher or the power of the shopbot is bigger (i.e. k is bigger). A n increase in the size of the common market raises price dispersion for a low size of the common market (informed consumers) and decreases it for a high value of this parameter. It is also shown that the results of the literature, showing convergence tho the monopoly price in a context of imperfect information when the number of firms increases, is directly attributable to an increase in the number of firms visited by informed and price sensitive consumers, i.e. the shopbot power. Finally, we discuss shortly some other possible driver of price dispersion such as capacity constraints and firms' differences in costs in a conte !Competition on electronic markets will result in lower price level and price dispersion. Such a view is commonly expressed in the literature of electronic commerce. It is justified by the fact that lower search costs by consumers and free entry for firms will foster price competition amongst firms. This paper tries to mitigate a bit this idea by looking at the influence of information and competition on prices of a homogeneous good. In this paper, we analyze the possible driver of price dispersion. We show in a first step that one important driver of price dispersion is the firm's ability to segregate consumers in two classes. One class is captive to a firm and is composed by uninformed consumers or informed consumers which are non-price sensitive. The other claiss is the market common to all firms and is compsed of informed and price sensitive consumers. Second, the existence of a captive market induces price dispersion. In addition when the common market of informed and price sensitive consumers sample k firms randomly (i.e. use each a personal shopbot of power k), then the mean price is higher when either the share of captive consumers is higher or the power of the shopbot is bigger (i.e. k is bigger). A n increase in the size of the common market raises price dispersion for a low size of the common market (informed consumers) and decreases it for a high value of this parameter. It is also shown that the results of the literature, showing convergence tho the monopoly price in a context of imperfect information when the number of firms increases, is directly attributable to an increase in the number of firms visited by informed and price sensitive consumers, i.e. the shopbot power. Finally, we discuss shortly some other possible driver of price dispersion such as capacity constraints and firms' differences in costs in a conte