Price Dispersion in Online Markets and the Effects of Dominant Merchants and Marketplaces

As the online market grows larger, it greatly influences the face of competition, poses new challenges, and creates new opportunities. One of the important aspects of studying the online market is examining the level of efficiency of the market, indicated by price dispersion. Although there is a large stream of research on online price dispersion, most studies are from early days of e-commerce. We use two large-scale datasets, which allow us to study price dispersion in different contexts. We study determinants of price dispersion using a larger set of attributes than that considered in the literature, including factors related to merchants, products, and the market. We also study different measures of price dispersion including common measures used in the literature (Gini coefficient, coefficient of variation, and price range) and one-sided measures of dispersion (lower and upper partial moments of prices). We show that using these measures together provides better understanding of the overall picture of price dispersion. Further, we use clustering to extract distinct market conditions, and the results show that the use of clustering, with large-scale data, helps identify different market conditions and provides better insights on dispersion in these market conditions. We also study the effect of dominant merchants on prices and price dispersion. Our results indicate that price dispersion increases as a result of a dominant merchant’s entry to the market despite a decrease in prices, and price dispersion decreases as the dominant merchant exits the market despite an increase in price levels. The results provide better understanding of how a dominant merchant’s entry brings more opportunities for other competitors to differentiate while its exit promotes price competition. We further study the influence of marketplaces on competition and price dispersion. By eliminating barriers to entry, marketplaces may have greatly facilitated an increase in competition intensity in today’s market. Our analyses show that marketplaces decrease price dispersion as they facilitate wider exposure of products to large number of customers. We find that not only marketplaces affect price dispersion, but also the owners of these marketplaces can influence both competition (within and across marketplaces) and price dispersion.