Essays on price-setting in online markets

This thesis includes three empirical papers focusing on pricing behaviour of online sellers. The first chapter investigates the impact of goods quality on pricing decision. We find the positive impact of product quality on the frequency of price changes. This impact can be explained with the higher search intensity of high-quality products, which put pressure on sellers to update their prices more frequently. Additionally, products with better quality have larger size of price changes due to the expensive quality premium which provides more room for sellers to adjust their prices. The analysis also reveals that the releases of successor products using new technology increase the frequency as well as the size of price adjustments of existing products. The second chapter explores price-setting after a foreign supply shock, which in turn affected the inventory level of domestic sellers. In this chapter, we employ the 2011 Thailand flood as an exogenous hard drive supply shock which severely affected inventory of U.S. sellers to examine sellers’ post-shock behaviour and the transmission of shock to relevant markets. We find that hard drive sellers raised their prices instantly in response to the shock suggesting that prices are flexible to sectoral shocks. This result shows little support for pricing models with “fear of customer anger” which suggest that sellers would not raise prices in response to such shock due to fear of damaging the relationship with customers. Further analysis provides evidence that the shock was transmitted via supply chains to other product types but the spillover is delayed and mitigated as the shock propagates through production networks. The third chapter uncovers the impact of seller reputation on pricing decision by using the rating score of sellers rated by customers in the online market. The results show that nonprice factors (such as seller reputation, selling effort, communication, service quality, and delivery lags), which are reflected by seller rating scores, play important roles in price-setting. In particular, sellers with higher rating scores tend to increase their prices more and decrease their prices less often. This result suggests that sellers can exploit their high-reputation to gain positive price premium in online markets and shows little support for pricing models with “customer anger”. Furthermore, besides the reputation level, the variations of seller reputation (standard deviation and frequency of increases/decreases of seller rating scores) are also important in price-setting as well as in explaining the price differences across sellers within a product. The findings contribute to the large literature on price stickiness and price dispersion by uncovering the impact of seller reputation and its variations on price stickiness as well as price dispersion. This chapter is also closely related to the literature on reputation mechanism in the online market