The Market Is Flat : How Buyers Use Electronic Channels to Extend Purchasing Reach and Reduce

We analyze how buyers use electronic channels to shift their purchases across geographic locations and the corresponding implications for geographic price variance and levels. Using data from the wholesale used vehicle market from 2003 to 2008, we find that buyers are more sensitive to price and less sensitive to distance when purchasing via an electronic channel than via the physical channel. This increases the likelihood that buyers using the electronic channel will eschew buying at a nearby location in favor of buying at a remote location where prices are lower. Because prices in the market are determined by auction rather than being fixed, these demand shifts cause prices to fall at the nearby location but to rise at the remote location. As a result, prices across locations become less variable, but not lower. The study extends the literature on how electronic trading affects geographic trade and price dispersion by: a) documenting the behavioral mechanism (cross-location demand shifting) that leads to lower price dispersion, b) considering the role of geographic location, which has been largely overlooked in studies of how electronic channels affect price dispersion, and c) analyzing dispersion when prices are determined by auction rather than being fixed.