Lower Price Dispersion Research Articles

Internet penetration and airline pricing: Evidence from China

This paper investigates the impacts of increasing Internet penetration on airfares and price dispersion in the Chinese airline market. It is found that an increase in Internet penetration is associated with higher average airfares and lower price dispersion between the major Chinese carriers. It appears that the increase in Internet penetration seems to have strengthened the major airlines’ ability to maintain price stability, which is an indication of the existence mutual forbearance among the major carriers confirmed in other studies. Higher prices and lower price dispersion are mostly to occur in the most heavily markets. This research also finds that if carriers possess similar degree of market power, the price dispersion between the airline pair is smaller. The findings can generate important policy insights, and inform anti-trust policies in the post-Covid period, when more consumers use Internet for search and inquiries, and when big data and artificial intelligence technologies mature.

Why do firms import via merchants in entrepôt countries rather than directly from the source?

AbstractUsing Norwegian import‐transactions data, this article studies which factors are associated with the probability of importing indirectly via third countries (entrepôts), rather than directly from the source. Source country characteristics—especially high trade barriers and unfavorable geographical locations—are important when time‐invariant unobserved heterogeneity is not controlled for. When controlling for this, however, firm‐ and product‐level characteristics stand out as the main drivers. Smaller and less productive firms more often import via entrepôts, especially when importing product‐source combinations that are relatively unimportant in their total imports and when importing products with low price dispersion and high value‐to‐weight ratios.

Exchange-Traded Funds and Municipal Bond Market

This paper studies the effect of exchange-traded funds' (ETFs) daily holding disclosure on the pre-trade transparency of municipal bond markets. Bonds held by ETFs have significantly smaller price dispersion than similar, non-ETF-held bonds. The relation holds when I exploit a plausibly exogenous variation in ETF disclosure quality, and is stronger for retail trades, on bonds associated with high uncertainty and in stressed markets, suggesting investors benefit more when information is scarce. I further document lower dealers' markup and inventory imbalance in markets of ETF-held bonds - an indication of higher customers' bargaining power resulting from improved transparency. ETF effects also spillover to the primary market, as when a municipality has outstanding bonds held by ETFs, its newly issued bonds have higher valuation and lower price dispersion. Overall, my findings indicate that ETF information disclosure is an important channel through which investors can gain additional insight into the pricing of municipal bonds.

Price dispersion of generic medications.

Generic pharmaceuticals should have very little price dispersion. Economics’ Law of One Price suggests that identical goods, in the absence of trade frictions and under conditions of free competition and price flexibility, should sell for the same price, and the FDA ensures that generics are identical. In this study, we examine whether generic pharmaceuticals indeed have the low price dispersion that theory predicts, and if not, whether the dispersion seen for pharmaceuticals used to treat neuropsychiatric conditions is substantially higher than that of other drugs. Such a difference may offer an explanation for the price dispersion seen: namely, a strategy that takes advantage of buyers’ cognitive constraints and impaired ability to comparison shop. We thus assembled a list of generic pharmaceuticals and their prices using www.GoodRx.com, based on a convenience sample of the 5 most popular drugs for 10 common medical conditions listed there. Three neuropsychiatric diagnoses were used: Alzheimer's disease, depression and schizophrenia. Seven other diagnoses served as controls: asthma; diabetes mellitus-type II; high cholesterol; hypertension; osteoarthritis; osteoporosis; and urinary tract infection. For each drug, we identified the highest and lowest prices and calculated the mean, median and coefficient of variation (CV). We further calculated the ratios of the highest price to the median price and of the highest to lowest price. We found that the mean price CV was 43%. For neuropsychiatric drugs and controls, it was 61% and 35%, respectively. The mean high-to-median ratio was3.7 for neuropsychiatric drugs and 1.9 for controls. The mean high-to-low ratio was 5.9 for neuropsychiatric drugs and 2.8 for controls. In short, generic medications have high price dispersion, despite public availability of prices. Although our study did not examine why this price dispersion is present, the especially large high-to-low price ratio for neuropsychiatric medications suggests a strategy that exploits vulnerable patients.

Cyclical Dynamics of Shopping: Aggregate Implications of Goods and Labor Markets

In this paper, I study the effects of consumers’ shopping effort behavior on aggregate business cycle dynamics. Literature shows that employed individuals search less and pay higher prices for identical goods than unemployed individuals. In addition to this result, using micro-level data, I find that shopping effort of consumers is procyclical, and the procyclicality is more pronounced for the unemployed individuals than employed ones. To explain these empirical facts and study the effects of them on the dynamics of aggregate variables, I build a model of endogenous price hunting in decentralized labor and product markets. I show that an individual buyer exerts less effort in looking for lower prices if the buyer i) has a higher income or ii) is less likely to find lower prices when facing lower price dispersion. Since the return to shopping is procyclical, unemployed buyers exhibit greater procyclicality. The procyclical shopping effort makes firms post relatively greater vacancies in recession than the model with fixed effort as they can post relatively higher prices. I find that while differential shopping behavior of the unemployed and employed amplify the volatilities of aggregate variables, procyclical shopping effort dampens this effect. The model also predicts that price rigidity depends on wage rigidity. I provide empirical evidence for these effects using the time use survey and the scanner data.

Corporate Bond Trading on a Limit Order Book Exchange*

We investigate the trading of corporate bonds (c-bonds) by an open limit order book (LOB) mechanism. To do so, we use the case of the Tel Aviv Stock Exchange (TASE) as a laboratory, in which both stocks and c-bonds are traded by an LOB mechanism. Contrary to the OTC market in the USA, the TASE c-bond market is liquid with narrow spreads and low price dispersion. The short-term traders (STT), who are the analog of the market makers in the LOB, have small trading rents and unconcentrated activity (a low Herfindahl index). In the cross-section of bonds, the low concentration is related to low spreads, low price dispersion, and small STT rents. The non-STT [including retail investors (RIs), whose participation is significant] competes with the STT on quotation and tends to tighter quotes. RIs’ activity contributes to narrower spreads.

Budget-neutral fiscal rulestargetinginflation differentials

In light of persistent inflation dispersion and high debt levels in the EMU, this paper investigates the desirability of budget-neutral fiscal policy rules that respond to the domestic inflation differential. The paper employs a two-country DSGE model of a monetary union with traded and non-traded goods. When consumption or labour income taxes respond to the domestic inflation differential while lump-sum taxes balance the budget, a national fiscal authority is able to reduce welfare costs of business cycle fluctuations by 1-4%. When lump-sum taxes are absent, hybrid rules using only distortionary taxes can reduce welfare costs by 6-10% under demand and supply disturbances. Gains in welfare stem from higher mean consumption due to lower price dispersion when the fiscal authority actively compresses the domestic inflation differential and thus domestic inflation.

Demand Uncertainty and Efficiency

I use a flexible price version of the Prescott (1975) “hotels” model to study a dynamic model that allows for storage. The formulation follows the standard competitive analysis tradition with a non-standard definition of markets: The set of markets that open depends on the state of demand. I use three planner’s problems to characterize various efficiency concepts that are used in the literature, but focus on the problem of a “weak” planner that faces the same constraints as the sellers in the model. From the point of view of the “weak” planner, the equilibrium outcome is efficient if the probability of becoming active is the same for all buyers. In general, the equilibrium outcome is not efficient from the point of view of a planner that has more information than the sellers in the model except for the case in which the costs of delaying trade are not important. The cost of delay is also relevant for price dispersion: Lower cost of delays may lead to lower price dispersion.

Behavioral heuristics and market patterns in a Bertrand–Edgeworth game

This paper studies Bertrand price-setting behavior when firms face capacity constraints (Bertrand–Edgeworth game). This game is known to lack equilibria in pure strategies, while the mixed-strategy equilibria are hard to characterize. We explore families of heuristic rules for individual price-setting behavior and the resulting market patterns, through simulations of agent-based models and laboratory experiments. Overall, the individual pricing strategies observed experimentally can be represented approximately by a sales-based simple rule. In the experiments, average market prices tend to converge from above and approach a state resembling a steady state, with slow aggregate price variations and low price dispersion around an average near the competitive level. However, that configuration can be disturbed occasionally by excursions triggered by discrete price raises of some agents. Salient features of experimental results can be described by simulations where agents use sales-based heuristics with parameters calibrated from the experiments. The results obtained here suggest the existence of useful complementarities between analytical, experimental and agent-based simulation approaches.

POPULATION CHARACTERISTICS AND PRICE DISPERSION IN THE MARKET FOR PRESCRIPTION DRUGS

We examine the relationship between population characteristics and price dispersion for 75 prescription drugs in five markets. Based on models of price dispersion, we consider that search costs are likely lower for the elderly, who are repeat purchasers. Expected benefits from search are likely higher for low‐income households, who lack insurance. Our results are consistent with the hypothesis that for communities with a large percentage of elderly and poor population, search effort is greater for pharmaceutical drugs, causing lower price dispersion. By understanding the characteristics of who searches for low drug prices, we begin to identify the motives of consumers that might also lead to search for the lowest cost healthcare provider or lowest cost insurance. The results suggest that the Medicare legislation that attempts to close the pharmaceutical doughnut hole may reduce search by the elderly, increase price dispersion, and potentially increase the average price of prescription drugs. (JEL D12, D83, I1, I18)

Online Price Dispersion: What Can We Learn from Amazon Marketplace?

11 April 2012 Abstract Online price dispersion has remained a puzzle for many years. In this article, we test the effects of a range of factors identified in the literature including vendor strategy, market structure, vendor heterogeneity and the time dimension. We use a dataset collected from the Amazon.com, Amazon.uk and the Amazon.fr marketplaces for books, CDs and DVDs from March to November 2006. First, using posted prices, we show that vendors make few modifications to their prices over time (once every 20 to 30 days), and those variations that they do make are relatively small (on average 15 cents). Secondly, we compare posted prices to transaction prices and we show that transaction prices do not necessarily correspond to the lowest posted price but rather centered around the median prices. Thirdly, we show that online price dispersion increases with the number of sellers mainly because new sellers price their product significantly lower that the current median price. Fourth, we show that there is a significant reputation premium of about 10 to 15%. A well established seller can charge a price 10 to 20% higher than the average seller. Our estimation results support the idea that price dispersion is sensitive to the maturity of the market. Consistent with our finding that price dispersion increases with the number of sellers, less mature markets, such as France with fewer sellers, exhibit lower price dispersion. Similarly, we find that large sellers account for a greater proportion of transactions in France than in the U.S. Lastly, we find that public policy can affect price dispersion: a French law limiting discounting on new books results in lower price dispersion in the French book market relative to book markets in the US and UK and relative to the French market for other goods.

Using Online Data to Explore Competitive Airline Pricing Policies

Since the mid-2000s, the airline industry has seen volatile fuel prices, a record number of carriers ending service, and a merger between two major airlines. In a time of such turmoil in the industry, it is increasingly important to understand the relationship between airline consolidation and competitive pricing policies, because this relationship directly affects the formation of new airline policies associated with competition policy (antitrust), deregulation, and mergers. However, there is a lack of consensus about market concentration and its influence on airfares, mainly because of data limitations of past research. Given the emergence of online booking engines, there is a new opportunity to collect detailed fare data. This project uses disaggregate online airfare data to study the relationship between market concentration and pricing policies. The data set includes 62 markets that cover a broad range of market structures. A case study approach is used to analyze the data. Using disaggregate fare data, this study finds low price dispersion can be associated with both low and high levels of market concentration. As the day of departure approaches, price dispersion is observed to increase or decrease, depending on the market. Additionally, peak and off-peak periods demonstrate different pricing strategies. Markets with codeshares sometimes exhibit unusually high price dispersion.

Tomb Price Discrimination in Cemeteries: Competition in the Market for Corpses?

We study empirically the determinants of public tomb prices in a sample of Spanish towns. We document strong evidence in favor that cemeteries act as local monopolies that use second degree price discrimination to maximize profits. Additionally we report that local cemetery prices react to competition from private cremation companies. This competition is associated with lower price dispersion caused by an increase in the minimum niche prices with no effect on other higher niche prices. We conclude that cemeteries have accommodated and facilitated entry of private cremation companies through an increase in those niche prices more likely to affect cremation demand.

Imperfect Information: The Persistence of Price Dispersion on the Web

In this article, the authors empirically test the notion that as the mean price of durables increases, the degree of dispersion also increases. This effect holds even when they specifically consider variables such as the number of competitors and store quality. The authors suggest that an individual-level perceptual mechanism, the psychophysics of price, at the aggregate level helps explain continued price dispersion on the Web. These results are contrary to predictions from standard economic theory, which suggest that readily available price information will result in increased price competition and lower price dispersion. Two studies consistently demonstrate that as the mean price of an item increases, price dispersion also increases. These results provide evidence that, contrary to general economic expectations, the Internet has not commoditized products. Retailers and managers need to pay attention to Internet information but not be fearful of its impact on their pricing strategies.

Bundling, integration and the delivered price of air travel: are low cost carriers full service competitors?

We explore the interaction between full service carriers (FSCs) and low cost carriers (LCCs) in a market for air travel, of which flying is merely one component in a bundle of services. The paper employs a locational approach to product differentiation to provide insights concerning the degree to which LCCs compete with FSCs. This approach highlights the role of airports in both geographic location relative to the travel market and as independent business entities that generate both airside and groundside revenues. A simple address model is used to illustrate conditions under which LCCs (affiliated with subsidiary airports) only constitute partial competition for FSCs. Consequently, market interactions between FSCs and LCCs can exhibit price stability and relatively low price dispersion. The model also indicates that vertical relationships between airports and airlines can be both profit enhancing and socially desirable.