Implications of Consumer Heterogeneity with Online and Offline Channels of Distribution

Abstract:     
The existing models of search cost and their applications to the internet markets, implicitly assume the consumers in the electronic markets to be essentially the searchers while those in the physical market typically constitute the non-searcher population. This paper departs from this traditional assumption to include a group of searcher and non-searcher in each of the physical and internet markets respectively for a homogenous good. The paper builds on the theoretical framework of Stahl (1989) to show that an increased share of people with internet access creates a positive externality by reducing the expected price in the overall market. However, this is associated with a higher dispersion of prices in the overall market. We also show that the searchers in the internet market on average pays a lower price than the searcher in the offline market. The same result is also found to hold true for the non-searchers in the two markets.

Number of Pages in PDF File: 39

Keywords: internet, search cost, price dispersion

JEL Classification: D8, L8

working papers series