Goodbye Price Dispersion? New Evidence from Transaction Prices in Electronic Markets

Price dispersion is an important indicator of market efficiency. Internet-based electronic markets have the potential to reduce transaction costs, thereby creating more efficient, “frictionless” markets, as predicted by the “law of one price”. However, prior work has reported significant levels of price dispersion on the Internet, which is in contrast with theoretical predictions. A key feature of the existing stream of work has been the use of posted price to estimate price dispersion. In principle, this can lead to an overestimation of the effect of price dispersion because in principle, a sale may not have occurred at that posted price. In this research, we use a unique dataset of transaction prices collected from both the electronic and traditional markets of government buyers to re-evaluate the extent of price dispersion. We find that price dispersion in the electronic market is as low as 0.04%, a level substantially smaller than that reported in the literature. The near-zero price dispersion suggests that in some electronic markets the “law of one price” can prevail when we consider transaction prices. We also find that price dispersion in the electronic market is significantly lower than that in the traditional market. These findings can be attributed both to the use of transaction price and to differences in government purchases from consumer purchases. Since the increased convenience and lower search costs in online markets have the potential to increase consumer surplus, we empirically estimate the efficiency gains accruing from transactions in relatively friction-free markets. Our analysis indicates that increased competition in electronic markets enhanced consumer surplus by as much as $134 million per year.