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Journal Article

Price Dispersion in the Lab and on the Internet: Theory and Evidence

Michael R. Baye and John Morgan
The RAND Journal of Economics
Vol. 35, No. 3 (Autumn, 2004), pp. 449-466
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/1593702
Page Count: 18
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Price Dispersion in the Lab and on the Internet: Theory and Evidence
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Abstract

Price dispersion is ubiquitous in settings that closely approximate textbook Bertrand competition. We show that only a little bounded rationality among sellers is needed to rationalize such dispersion. A variety of statistical tests, based on datasets from two independent laboratory experiments and structural estimates of the parameters of our models, suggest that bounded-rationality-based theories of price dispersion organize the data remarkably well. Evidence is also presented to suggest that the models are consistent with data from a leading Internet price comparison site.

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