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Firm strategy and biased decision making: the price dispersion puzzle

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  • Ofer H. Azar

Abstract

This article confronts the empirical evidence and theoretical predictions about the correlation between price dispersion and price. Theoretically, search and location differentiation models suggest that price dispersion is a function of search and transportation costs, but is independent of the good's price. Empirical evidence, however, suggests otherwise: price dispersion and price are strongly correlated. This article points out the discrepancy between theory and evidence, which it denotes as ‘the price dispersion puzzle’. It then explains why the documented behaviour of relative thinking (people behave as if their search or transportation costs are increasing in the good's price) can solve the puzzle.

Suggested Citation

  • Ofer H. Azar, 2013. "Firm strategy and biased decision making: the price dispersion puzzle," Applied Economics, Taylor & Francis Journals, vol. 45(7), pages 901-910, March.
    • Handle: RePEc:taf:applec:45:y:2013:i:7:p:901-910
    DOI: 10.1080/00036846.2011.613778
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    References listed on IDEAS

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    1. John Connor, 2005. "Collusion and price dispersion," Applied Economics Letters, Taylor & Francis Journals, vol. 12(6), pages 335-338.
    2. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
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    Cited by:

    1. Azar, Ofer H., 2009. "Do consumers make too much effort to save on cheap items and too little to save on expensive items? experimental results and implications for business strategy," MPRA Paper 20962, University Library of Munich, Germany.
    2. Azar, Ofer H., 2008. "The effect of relative thinking on firm strategy and market outcomes: A location differentiation model with endogenous transportation costs," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 684-697, November.
    3. Azar, Ofer H., 2006. "Behavioral industrial organization, firm strategy, and consumer economics," MPRA Paper 4484, University Library of Munich, Germany.
    4. Fran 篩s-Charles Wolff, 2015. "Does price dispersion increase with quality? Evidence from the online diamond market," Applied Economics, Taylor & Francis Journals, vol. 47(55), pages 5996-6009, November.
    5. Ofer H Azar, 2015. "A Linear City Model with Asymmetric Consumer Distribution," PLOS ONE, Public Library of Science, vol. 10(6), pages 1-13, June.

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