Abstract
AbstractLimited information is the key element generating price dispersion in models of homogeneous‐goods markets. We show that the global relationship between information and price dispersion is an inverse‐U shape. We test this mechanism for the retail gasoline market using a new measure of information based on commuter data from Austria. Commuters sample gasoline prices on their commuting route, providing us with spatial variation in the share of informed consumers. Our empirical estimates are in line with the theoretical predictions. We also quantify how information affects average prices paid and the distribution of surplus in the gasoline market.
Highlights
Price competition in homogeneous goods markets rarely results in market outcomes in line with the “law of one price.” On the contrary, price dispersion is ubiquitous and differences in location, cost or services attributed to seemingly homogeneous goods cannot fully explain observed price dispersion
We believe that our setting is closer in spirit to the seminal clearinghouse models of Varian (1980) and Stahl (1989) for the following reasons: (a) firms’ abilities to obfuscate consumers’ search and learning efforts are limited in this market, (b) gasoline is a homogeneous product and seller characteristics can be adequately controlled, (c) we observe substantial variation in our measure of the share of informed consumers, enabling us to test the global prediction derived from theory, and (d) the consumers’ decisions to commute - and to become better informed - is not determined by regional differences in price dispersion, which allows a causal interpretation of our empirical results
We have shown that clearinghouse models generate an inverted U relationship between price dispersion and the share of informed consumers
Summary
Price competition in homogeneous goods markets rarely results in market outcomes in line with the “law of one price.” On the contrary, price dispersion is ubiquitous and differences in location, cost or services attributed to seemingly homogeneous goods cannot fully explain observed price dispersion. We believe that our setting is closer in spirit to the seminal clearinghouse models of Varian (1980) and Stahl (1989) for the following reasons: (a) firms’ abilities to obfuscate consumers’ search and learning efforts are limited in this market, (b) gasoline is a homogeneous product and seller characteristics can be adequately controlled, (c) we observe substantial variation in our measure of the share of informed consumers, enabling us to test the global prediction derived from theory, and (d) the consumers’ decisions to commute - and to become better informed - is not determined by regional differences in price dispersion, which allows a causal interpretation of our empirical results.
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