Firm Heterogeneities, Click-through Fees and Pricing in Oligopoly: Theory and Evidence

This paper examines the impact of …rm heterogeneities on equilibrium pricing behavior in an online market where an information gatekeeper charges click-through fees. As opposed to the assumption of Baye and Morgan (2001) that …rms pay the gatekeeper a …xed fee regardless of the number of clicks they receive, under a click-through regime, a …rm pays a listing fee only if it is clicked. This di¤erence helps rationalize the observation that some …rms that persistently charge high prices nonetheless advertise prices at comparison sites. Furthermore, the presence of sellers with very high prices distorts the “e¤ective” number of competitors in the market, which is crucial factor in determining the equilibrium mixed strategy of actively competing …rms. Data collected from a leading price comparison site reveal asymmetric pricing patterns across …rms consistent with the theoretical model: some …rms persistently charge high prices while other …rms appear to randomize prices. Using Nonlinear Two-Step GMM estimator based on empirical distribution function (EDF), we obtain consistent structural estimates of the “e¤ective”number of competitors in the market, the proportion of customers who use the price comparison site, and the welfare gains the price comparison site generates for consumers. The results signal the necessity of addressing …rm heterogeneities and click-through fees in empirical studies; failing to account for asymmetric pricing biases estimates of the e¤ective number of competitors by almost 70 percent.