The impact of price adjustment costs on price dispersion in E-commerce

Abstract We analyze price dispersion using panel data from a large price comparison site. We use past pricing behavior to instrument for potential endogeneity of firms to select into certain product markets. Our main result is that greater price adjustment costs result in greater price dispersion even in e-commerce markets where price adjustment cost are thought to be negligible. Although the impact of price adjustment costs on price dispersion became weaker over time, the causal effect of price adjustment costs on price dispersion is still present at the end of our observation period. Our results are robust to many alternative empirical specifications. We also control for a range of alternative explanations of price dispersion, such as search cost, service differentiation, obfuscation, vertical restraints, and market structure.