Can online price dispersion be explained by characteristic differences in retailers? A look into the television industry

Can Online Price Dispersion be Explained by Characteristic Differences in Retailers? A look into the television industry* Daniel Mazzone* Towson University May 12, 2015 Abstract Economic theory suggests that, due to near-zero online search costs for consumers, price dispersion of homogeneous goods should converge towards zero. However, despite theoretical predictions, price disper¬ sion is pervasive on many online markets. This paper uses econometric tools to analyze a panel data set of prices of best-selling TV models offered by several online retailers as we attempt to pinpoint retailer- specific characteristics that lead to price differentials of identical mod¬ els. Results suggest that retailers with a national brick- and-mortar presence and those that offer full refunds for returned televisions are able to charge higher prices, which can be explained by the fact that customers are willing to pay a price premium for store reputation and returns flexibility. A less intuitive result is that retailers that offer free shipping tend to charge overall lower prices, which can only be explained by logistical and scale advantages. JEL Classification: D21, D22, D23, Lll Keywords: Price Dispersion, Bertrand, Search Costs. * We would like to thank our committee members, Dr. Vlad Radoias, Dr. James Manley, and Dr. Finn Christensen, the Towson University Honors College and the Economics Department. ^Department of Economics, Towson University, 8000 York Road, Towson, MD 21252 1