Price Dispersion in the Lab and on the Internet: Theory and Evidence
Volume: Volume 35, No. 3
Issue: Autumn 2004
Pages: 448-466
Authors: Michael R. Baye and John Morgan
Title: Price Dispersion in the Lab and on the Internet: Theory and Evidence
Abstract: Price dispersion is ubiquitous in settings that closely approximate textbook Bertrand competition. We show that only a little bounded rationality among sellers is needed to rationalize such dispersion. A variety of statistical tests, based on datasets from two independent laboratory experiments and structural estimates of the parameters of our models, suggest that bounded-rationality-based theories of price dispersion organize the data remarkably well. Evidence is also presented to suggest that the models are consistent with data from a leading Internet price comparison site.