What is Price Dispersion

In the pre-Internet era, consumers relied on media such as Sunday newspapers and flyers for product and price information. Such a search process is time-consuming and unlikely to be exhaustive. Existence of incomplete information has been shown to lead to price dispersion (Stigler, 1961). Recent advances in information technology have dramatically changed the manner by which consumers and businesses gather and transmit information. With a few mouse-clicks, consumers are able to compare price information from a wide range of vendors. With the advent of the Internet, especially the introduction of price comparison sites or shopbots, competition among online retailers escalates and we might expect prices to converge in the new economy. However, substantially decreased transaction cost has apparently not led to online price convergence. An extensive literature on Internet pricing has documented persistent price dispersion in online markets. In this chapter, I review price dispersion and related literatures, and discuss future research directions.