Analysis on the Dominance of Search Cost in Affecting Price Dispersion

Abstract

The prevalent phenomenon of price dispersion in goods which was initially proposed by Stigler in 1961, is held accountable for the constantly increasing trading frictions in markets especially with the development of e-commerce, as a violation of the law of one price. This study illustrates how price dispersion is affected by search cost, particularly concerning three specific branches respectively- asymmetric information, customer heterogeneity, and consumer confusion. Analyzing 25 papers chronologically reinforced the causal relationship between these three factors and the level of search cost induced, also with illustrations of how three specific branches within search cost each variously contributes to the occurrence of price dispersion will be provided in this paper. Nevertheless, the extent to which limitations in each branch in affecting price dispersion will be provided. As a result, this paper aims to produce a balanced view of the ways search cost acts as the dominant factor in affecting price dispersion.