Information and Price Dispersion: Theory and Evidence

Abstract

Limited information is the key element generating price dispersion in models of homogeneous-goods markets. We show that the global relationship between information and price dispersion is an inverse-U shape. We test this mechanism for the retail gasoline market using a new measure of information based on commuter data from Austria. Commuters sample gasoline prices on their commuting route, providing us with spatial variation in the share of informed consumers. Our empirical estimates are in line with the theoretical predictions. We also quantify how information affects average prices paid and the distribution of surplus in the gasoline market.

Market Liberalization: Price Dispersion, Price Discrimination and Consumer Search in the German Electricity Markets

“…More recently, Tang et al (2010) examine the impact of changes in shopbot use on prices and price dispersion in online book retailing and find that an increase in shopbot use reduces average prices and price dispersion. Pennersdorfer et al (2015) find an inverted U-shaped relation between price dispersion and the share of informed consumers (as proxied by the share of commuters) in the Austrian gasoline retail market; Sengupta and Wiggins (2014) investigate whether online and offline prices for airline fares differ but do not find a significant difference. However, the above literature does not explicitly deal with the incumbency effects and the resulting asymmetry between firms that is important to understand the functioning of liberalized markets.…”

“…In the context of the German electricity market, or other markets where price comparison websites are available, one can think of search as consulting a platform so that at a cost consumers have ac-4 Many papers proxy for lower search costs or consumers' level of information by access to the internet or online versus offline purchases (Brown and Goolsbee, 2002;Brynjolfsson and Smith, 2014). Similarly, Pennersdorfer et al (2015) use commuters versus non-commuters to distinguish between informed and uninformed consumers in the retail gasoline market and Chandra and Tappata (2011) use the distance between gas stations as a proxy for consumer information.…”

Gasoline Price Dispersion and Consumer Search: Evidence from a Natural Experiment

“…Chandra and Tappata [2011] find that price dispersion is lower across stations at the same intersection, while Pennerstorfer et al . [2015] find that price dispersion depends on the percentage of (generally better informed) commuter traffic present in an area.…”

Is intertemporal price discrimination the cause of price dispersion in markets with low search costs?

“…A common feature of these models is that the use of mixed strategies creates price dispersion in equilibrium. Clearinghouse models have also been widely used as a motive for empirical studies relating price dispersion to the size of search costs in different markets (Bayliss and Perloff 2002;Lach 2002;Baye, Morgan, and Scholten 2004;Seim and Sinkinsson, 2016;Pennerstorfer et al 2020).…”