Online Price Dispersion: A Game Theoretic Perspective and Empirical Evidence

Information Systems Research. 23(2): 575-592. 2012.

37 Pages Posted: 28 Feb 2007 Last revised: 14 May 2015

See all articles by Sulin Ba

Sulin Ba

University of Connecticut School of Business

Jan Stallaert

University of Connecticut - School of Business

Zhongju Zhang

Arizona State University (ASU) - Department of Information Systems

Date Written: January 10, 2008

Abstract

The Internet has changed the nature of doing business as well as the nature of competition in many industries. Consumers are more empowered than ever with valuable information such as prices, products, and store ratings. Because of this, some researchers even predicted, during the early stage of e-commerce, a frictionless economy in which online prices would be driven down to marginal costs. However, many studies have subsequently observed the wide price dispersion online, and its existence and persistence has now been well documented. Possible explanations of this price dispersion, derived mainly using hedonic price models, have seen only modest success. In this paper, we propose an alternative competitive model, based on online retailers' differentiation, to explain price dispersion. We empirically test the predictions of this model and find that the model is a viable alternative to the hedonic price model. In addition, our competitive model is able to predict and explain observations that are seemingly inconsistent with a hedonic model. Practically, our model yields important recommendations for the online etailing industry and can help an e-tailer to choose a desirable position in the competitive market.

Keywords: e-service, service quality, price competition, vertical differentiation, brand recognition

JEL Classification: D21, D40, L11

Suggested Citation

Ba, Sulin and Stallaert, Jan and Zhang, Zhongju, Online Price Dispersion: A Game Theoretic Perspective and Empirical Evidence (January 10, 2008). Information Systems Research. 23(2): 575-592. 2012.. Available at SSRN: https://ssrn.com/abstract=965774 or http://dx.doi.org/10.2139/ssrn.965774

Sulin Ba (Contact Author)

University of Connecticut School of Business ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

Jan Stallaert

University of Connecticut - School of Business ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

Zhongju Zhang

Arizona State University (ASU) - Department of Information Systems ( email )

400 E Lemon St
Tempe, AZ AZ 85287
United States

HOME PAGE: http://https://apps.wpcarey.asu.edu/directory/people/profile.cfm?person=2259040

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