Price Dispersion and Price Rigidity in Online Markets: Theory and Evidence (Dissertation Proposal)

Asymmetry exists among the firms selling homogeneous product in online market. This paper provides a theoretical study on the equilibrium behavior of the firms and the information gatekeeper in a duopoly market with asymmetric sizes of loyal consumers. In equilibrium, the firm with larger number of loyal consumers tends to advertise less frequently but charges a lower average price whenever advertising. And the optimal advertising fee charged by the information gatekeeper depends on the degree of asymmetry of the market. As the market becomes more asymmetric, the gatekeeper charges a higher advertising fee. ∗We are specially grateful to Prof. Michael Baye for his valuable advice and to Kyle Anderson, Alex Borisov, Xiaoxun Gao, Qi Meng, and Mayya Sengupta for their helpful comments and suggestions to improve this paper. We also thank Guoning Yang for sharing us the online pricing data. All remaining errors are ours. †The combined work of this paper and the parallel research by Michael Arnold and Christine Saliba at University of Delaware is submitted to Journal of Industrial Economics. ‡Department of Economics, Indiana University, Bloomington, IN, 47405. §Department of Business Economics and Public Policy, Kelley School of Business, Indiana University, Bloomington.