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

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  • Charlie Lindgren
  • Sven-Olov Daunfeldt
  • Niklas Rudholm
  • Siril Yella

Abstract

Theories of intertemporal price discrimination imply that prices must be chosen using mixed strategies, with retailers changing their prices randomly over time. Otherwise, consumers will learn which retailer has the lowest price, and eventually, all customers will patronize the lowest price retailer, or all retailers will charge the same price. We test whether price dispersion is explained by intertemporal price discrimination strategies using a dataset of identical products sold through the PriceSpy price comparison website. Our results show that there are clusters of retailers with similar pricing within each cluster, but with different price levels between clusters even after controlling for retailer heterogeneity. Retailers also remain in the same price cluster over time, suggesting that consumers have ample opportunities to learn which retailers belong to which price cluster. Intertemporal price discrimination is thus unlikely to have caused the observed price dispersion.

Suggested Citation

  • Charlie Lindgren & Sven-Olov Daunfeldt & Niklas Rudholm & Siril Yella, 2021. "Is intertemporal price discrimination the cause of price dispersion in markets with low search costs?," Applied Economics Letters, Taylor & Francis Journals, vol. 28(11), pages 968-971, June.
    • Handle: RePEc:taf:apeclt:v:28:y:2021:i:11:p:968-971
    DOI: 10.1080/13504851.2020.1789055
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    1. Giorgino, Toni, 2009. "Computing and Visualizing Dynamic Time Warping Alignments in R: The dtw Package," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 31(i07).
    2. Robert Thorndike, 1953. "Who belongs in the family?," Psychometrika, Springer;The Psychometric Society, vol. 18(4), pages 267-276, December.
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    Cited by:

    1. Lindgren, Charlie & Daunfeldt, Sven-Olov & Rudholm, Niklas, 2021. "Pricing In Retail Markets With Low Search Costs: Evidence From A Price Comparison Website," HFI Working Papers 18, Institute of Retail Economics (Handelns Forskningsinstitut).
    2. Lindgren, Charlie, 2021. "Discontinuities: What is the value of having the lowest price or highest consumer rating on a price comparison website?," HFI Working Papers 19, Institute of Retail Economics (Handelns Forskningsinstitut).
    3. Lindgren, Charlie & Li, Yujiao & Rudholm, Niklas, 2020. "Why do firms compete on price comparison websites? The impact on productivity, profits, and wages," HFI Working Papers 14, Institute of Retail Economics (Handelns Forskningsinstitut).

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    More about this item

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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