Price dispersion
Encyclopedia
In economics
, price dispersion is variation in prices across sellers of the same item, holding fixed the item's characteristics. Price dispersion can be viewed as a measure of trading frictions (or, tautologically, as a violation of the law of one price
). It is often attributed to consumer search
costs or unmeasured attributes (such as the reputation) of the retailing outlets involved. There is a difference between price dispersion and price discrimination
. The latter concept involves a single provider charging different prices to different customers for an identical good. Price dispersion, on the other hand, is best thought of as the outcome of many firms potentially charging different prices, where customers of one firm find it difficult to patronize (or are perhaps unaware of) other firms due to the existence of search cost
s.
Price dispersion measures include the range of prices, the percentage
difference of highest and lowest price, the standard deviation
of the price distribution, the variance
of the price distribution, and the coefficient of variation
of the price distribution.
In most theoretical literature, price dispersion is argued as result from spatial difference and the existence of significant search cost. With the development of internet and shopping agent programs, conventional wisdom tells that price dispersion should be alleviated and may eventually disappear in the online market due to the reduced search cost for both price and product features. However, recent studies found a surprisingly high level of price dispersion online, even for standardized items such as books, CDs and DVDs. There is some evidence of a shrinking of this online price dispersion, but it remains significant. Recently, work has also been done in the area of e-commerce, specifically the Semantic Web, and its effects on price dispersion.
Hal Varian
, an economist at U. C. Berkeley, argued in a 1980 article that price dispersion may be an intentional marketing technique to encourage shoppers to explore their options.
A related concept is that of wage dispersion
.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, price dispersion is variation in prices across sellers of the same item, holding fixed the item's characteristics. Price dispersion can be viewed as a measure of trading frictions (or, tautologically, as a violation of the law of one price
Law of one price
The law of one price is an economic law stated as: "In an efficient market, all identical goods must have only one price."-Intuition:The intuition for this law is that all sellers will flock to the highest prevailing price, and all buyers to the lowest current market price. In an efficient market...
). It is often attributed to consumer search
Search theory
In microeconomics, search theory studies buyers or sellers who cannot instantly find a trading partner, and must therefore search for a partner prior to transacting....
costs or unmeasured attributes (such as the reputation) of the retailing outlets involved. There is a difference between price dispersion and price discrimination
Price discrimination
Price discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider...
. The latter concept involves a single provider charging different prices to different customers for an identical good. Price dispersion, on the other hand, is best thought of as the outcome of many firms potentially charging different prices, where customers of one firm find it difficult to patronize (or are perhaps unaware of) other firms due to the existence of search cost
Search cost
Search costs are one facet of transaction costs or switching costs. Rational consumers will continue to search for a better product or service until the marginal cost of searching exceeds the marginal benefit. Search theory is a branch of microeconomics that studies decisions of this type.The costs...
s.
Price dispersion measures include the range of prices, the percentage
Percentage
In mathematics, a percentage is a way of expressing a number as a fraction of 100 . It is often denoted using the percent sign, “%”, or the abbreviation “pct”. For example, 45% is equal to 45/100, or 0.45.Percentages are used to express how large/small one quantity is, relative to another quantity...
difference of highest and lowest price, the standard deviation
Standard deviation
Standard deviation is a widely used measure of variability or diversity used in statistics and probability theory. It shows how much variation or "dispersion" there is from the average...
of the price distribution, the variance
Variance
In probability theory and statistics, the variance is a measure of how far a set of numbers is spread out. It is one of several descriptors of a probability distribution, describing how far the numbers lie from the mean . In particular, the variance is one of the moments of a distribution...
of the price distribution, and the coefficient of variation
Coefficient of variation
In probability theory and statistics, the coefficient of variation is a normalized measure of dispersion of a probability distribution. It is also known as unitized risk or the variation coefficient. The absolute value of the CV is sometimes known as relative standard deviation , which is...
of the price distribution.
In most theoretical literature, price dispersion is argued as result from spatial difference and the existence of significant search cost. With the development of internet and shopping agent programs, conventional wisdom tells that price dispersion should be alleviated and may eventually disappear in the online market due to the reduced search cost for both price and product features. However, recent studies found a surprisingly high level of price dispersion online, even for standardized items such as books, CDs and DVDs. There is some evidence of a shrinking of this online price dispersion, but it remains significant. Recently, work has also been done in the area of e-commerce, specifically the Semantic Web, and its effects on price dispersion.
Hal Varian
Hal Varian
Hal Ronald Varian is an economist specializing in microeconomics and information economics. He is the Chief Economist at Google and he holds the title of emeritus professor at the University of California, Berkeley where he was founding dean of the School of Information...
, an economist at U. C. Berkeley, argued in a 1980 article that price dispersion may be an intentional marketing technique to encourage shoppers to explore their options.
A related concept is that of wage dispersion
Wage dispersion
Wage dispersion is an economic term which refers to the amount of variation in wages encountered in an economy.-Wage dispersion in the US and Europe:European countries have in general much less wage dispersion than the U.S. does...
.