Estimating Firm-Level Demand at a Price Comparison Site: Accounting for Shoppers and the Number of Competitors

46 Pages Posted: 2 Feb 2005

See all articles by Michael R. Baye

Michael R. Baye

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

John Morgan

University of California, Berkeley - Economic Analysis & Policy Group

Rupert Gatti

University of Cambridge - Faculty of Economics

Paul Kattuman

University of Cambridge - Judge Business School

Date Written: December 2004

Abstract

Clearinghouse models of online pricing - such as Varian (1980), Rosenthal (1980), Narasimhan (1988), and Baye-Morgan (2001) - view a price comparison site as an "information clearing-house" where shoppers and loyals obtain price and product information to make online purchases. These models predict that the responsiveness of a firm's demand to a change in its price depends on the number of sellers and whether the price change results in the firm charging the lowest price in the market. Using a unique firm-level dataset from Kelkoo.com (Yahoo!'s European price comparison site), we examine these predictions by providing estimates of the demand for PDAs. Our results indicate that the number of competing sellers and both the firm's location on the screen and relative ranking in the list of prices are important determinants of an online retailer's demand. We find that an online monopolist faces an elasticity of demand of about -2, while sellers competing against 10 other sellers face an elasticity of about -6. We also find empirical evidence of a discontinuous jump in a firm's demand as its price declines from the second-lowest to the lowest price. Our estimates suggest that about 13% of the consumers at Kelkoo are "shoppers" who purchase from the seller offering the lowest price.

JEL Classification: D40, C25, C81, M30, L10

Suggested Citation

Baye, Michael Roy and Morgan, John and Gatti, J. Rupert J. and Kattuman, Paul A., Estimating Firm-Level Demand at a Price Comparison Site: Accounting for Shoppers and the Number of Competitors (December 2004). Available at SSRN: https://ssrn.com/abstract=655461 or http://dx.doi.org/10.2139/ssrn.655461

Michael Roy Baye

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-2779 (Phone)
812-855-3354 (Fax)

John Morgan (Contact Author)

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-2669 (Phone)
810-885-5959 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/rjmorgan/

J. Rupert J. Gatti

University of Cambridge - Faculty of Economics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
+44 1223 339929 (Phone)

Paul A. Kattuman

University of Cambridge - Judge Business School ( email )

Trumpington Road
Cambridge CB2 1AG
United Kingdom
+44 1223 764 136 (Phone)

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