Why Is Price Dispersion Higher Online Than Offline? The Impact of Retailer Type and Shopping Risk on Price Dispersion.

66 Pages Posted: 31 Jan 2018

See all articles by Hejun Zhuang

Hejun Zhuang

Brandon University

Peter T. L. Popkowski Leszczyc

University of Queensland - Business School

Yuanfang Lin

Conestoga College

Date Written: January 22, 2018

Abstract

When physically similar products, of similar quality, are offered by retailers both online and offline, we often observe that the dispersion in prices of these products online is greater than the price dispersion offline. This observation runs counter to early theories that suggested price dispersion online would be smaller than that offline due to the ease of search and information availability online. This paper investigates and provides an explanation for this puzzling phenomenon by examining the impact of two important drivers of price dispersion: retailer type and consumers’ shopping risk. Retailer type refers to whether a retailer is a pure offline, pure online, or dual channel retailer. Shopping risk is defined as the product of consumers’ perceived risk of shopping and the transaction uncertainty related to shopping at different types of retailers.

A game-theoretic approach is adopted to model consumers’ price search and product purchase, as well as price competition within and across retailer types in online and offline markets. Equilibrium pricing strategies are derived for different retailer types competing for different consumer segments with different levels of perceived shopping risk. The impact of retailer type and shopping risk on online versus offline price dispersion are quantified, and conditions when price dispersion is greater online than offline are identified.

Results indicate that price dispersion is greater online when the number of pure online retailers is sufficiently large and is increasing in the number of pure online retailers. In addition, a reduction in online shopping risk may actually increase online price dispersion. Results further suggest that even without any online sales, dual channel retailers should maintain their online presence for the purpose of information dissemination, which justifies the importance for pure offline retailer to incorporate webrooming strategies, where consumers can search for prices online but purchase offline.

Keywords: Price Dispersion, Online, Offline, Retailer Type, Shopping Risk, Game Theory

JEL Classification: C7, D1, D4, M31

Suggested Citation

Zhuang, Hejun and Popkowski Leszczyc, Peter T. L. and Lin, Yuanfang, Why Is Price Dispersion Higher Online Than Offline? The Impact of Retailer Type and Shopping Risk on Price Dispersion. (January 22, 2018). Forthcoming in Journal of Retailing; University of Alberta School of Business Research Paper No. 2018-701. Available at SSRN: https://ssrn.com/abstract=3107389 or http://dx.doi.org/10.2139/ssrn.3107389

Hejun Zhuang (Contact Author)

Brandon University ( email )

Brandon, Manitoba
Canada

Peter T. L. Popkowski Leszczyc

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Yuanfang Lin

Conestoga College ( email )

299 Doon Valley Drive
Kitchener, Ontario N2G 4M4
Canada

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