Consumer Price Search and Platform Design in Internet Commerce

41 Pages Posted: 2 Sep 2014 Last revised: 2 Apr 2015

See all articles by Michael Dinerstein

Michael Dinerstein

University of Chicago

Liran Einav

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Jonathan Levin

Stanford University - Department of Economics; Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Neel Sundaresan

eBay Research Labs

Date Written: August 2014

Abstract

Search frictions can explain why the "law of one price" fails in retail markets and why even firms selling commodity products have pricing power. In online commerce, physical search costs are low, yet price dispersion is common. We use browsing data from eBay to estimate a model of consumer search and price competition when retailers offer homogeneous goods. We find that retail margins are on the order of 10%, and use the model to analyze the design of search rankings. Our model explains most of the effects of a major re-design of eBay's product search, and allows us to identify conditions where narrowing consumer choice sets can be pro-competitive. Finally, we examine a subsequent A/B experiment run by eBay that illustrates the greater difficulties in designing search algorithms for differentiated products, where price is only one of the relevant product attributes.

Suggested Citation

Dinerstein, Michael and Einav, Liran and Levin, Jonathan D. and Sundaresan, Neel, Consumer Price Search and Platform Design in Internet Commerce (August 2014). NBER Working Paper No. w20415. Available at SSRN: https://ssrn.com/abstract=2490301

Michael Dinerstein (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

HOME PAGE: http://https://sites.google.com/site/michaeldinerstein/

Liran Einav

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-723-3704 (Phone)
928-223-4973 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jonathan D. Levin

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Neel Sundaresan

eBay Research Labs ( email )

2065 Hamilton Avenue
San Jose, CA
United States

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