Abstract
AbstractThe large and growing industry of price comparison websites (PCWs) or “web aggregators” is poised to benefit consumers by increasing competitive pricing pressure on firms by acquainting shoppers with more prices. However, these sites also charge firms for sales, which feeds back to raise prices. I find that introducing any number of PCWs to a market increases prices for all consumers, both those who use the sites and those who do not. I then use my framework to identify ways in which a more competitive environment could be achieved.
Highlights
Over the past two decades a new industry of price comparison websites (PCWs) or “web aggregators” has emerged
The main result of this paper is that the equilibrium fee that PCWs charge for a sale through their sites is sufficiently high to negate the benefits from the increased inter-firm competition
With a monopolist PCW, I find a unique equilibrium in which: the PCW charges a positive commission level; prices are dispersed; firms list their price on the PCW; and active consumers search only the PCW
Summary
Over the past two decades a new industry of price comparison websites (PCWs) or “web aggregators” has emerged. While a consumer may not know of all the firms in a market, a PCW can expose the full list of market offerings, maximizing inter-firm pricing pressure Underlying this increased competition are the fees paid by firms who sell their products through the websites. The main result of this paper is that the equilibrium fee that PCWs charge for a sale through their sites is sufficiently high to negate the benefits from the increased inter-firm competition. The resulting lack of downward competitive pressure on commissions allows the monopoly rate of commission to be sustained in equilibrium with any number of PCWs in the market, a rate that I show to be tempered by firms’ outside option, but high enough to increase expected prices for all consumers, relative to a world without the industry.
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