Price dispersion and competition

Abstract

The law of one price is almost always empirically rejected and researchers observe price dispersion mostly due to price discrimination. We discuss the different degrees of price discrimination and different models in a monopoly or oligopoly setting. We find that price discrimination increases prices but it is not always harmful towards social welfare compared to uniform pricing. Price dispersion is ubiquitous in online and traditional markets and we investigate the sources behind it. Two leading sources of price dispersion are consumer heterogeneity and consumer search costs and we also find a positive correlation between them and price dispersion. Price dispersion can also arise from consumer confusion over price comparison and inertia. We believe that the most important source of price dispersion is market competition and we conclude by discussing how market concentration/market competition affects price dispersion. We discuss the two opposing theories in the rather limited literature and the rich empirical evidence which does not yield a straightforward relationship. We believe that the relationship between market structure and price dispersion is matter of empirical analysis.