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A Nearly perfect market? Differentiation vs. price in consumer choice

Author: Brynjolfsson, Erik ; Dick, Astrid A. ; Smith, Michael DINSEAD Area: Economics and Political ScienceIn: Quantitative Marketing and Economics, vol. 8, no. 1, March 2010 Language: EnglishDescription: p. 1-33.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: Internet shopbots allow consumers to almost instantly compare prices and other characteristics from dozens of sellers via a single website. We estimate the magnitude of consumer search costs and benefits using data from a major shopbot for books. For the median consumer, the estimated benefit from simply scrolling down to search lower screens is $6.55. This amounts to about 60% of the observed price dispersion and suggests that consumers face significant search costs, even in this “nearly-perfect” market. Price elasticities are relatively high compared to offline markets (-7 to -10 in our base model). Furthermore, contrary to the common assumption, search intensity is not correlated with greater price sensitivity. Instead, consumers who search multiple screens put relatively more weight on non-price factors like brand
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Internet shopbots allow consumers to almost instantly compare prices and other characteristics from dozens of sellers via a single website. We estimate the magnitude of consumer search costs and benefits using data from a major shopbot for books. For the median consumer, the estimated benefit from simply scrolling down to search lower screens is $6.55. This amounts to about 60% of the observed price dispersion and suggests that consumers face significant search costs, even in this “nearly-perfect” market. Price elasticities are relatively high compared to offline markets (-7 to -10 in our base model). Furthermore, contrary to the common assumption, search intensity is not correlated with greater price sensitivity. Instead, consumers who search multiple screens put relatively more weight on non-price factors like brand

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