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Consumer Price Search and Platform Design in Internet Commerce

Aug 2014
Working Paper
13-038
By  Michael Dinerstein, Liran Einav, Jonathan Levin, Neel Sundaresan
Search frictions can explain why the "law of one price" fails in retail markets and why even firms selling commodity products have pricing power. In online commerce, physical search costs are low, yet price dispersion is common. We use browsing data from eBay to estimate a model of consumer search and price competition when retailers offer homogeneous goods. We find that retail margins are on the order of 10%, and use the model to analyze the design of search rankings. Our model explains most of the effects of a major re-design of eBay's product search, and allows us to identify conditions where narrowing consumer choice sets can be pro-competitive. Finally, we examine a subsequent A/B experiment run by eBay that illustrates the greater difficulties in designing search algorithms for differentiated products, where price is only one of the relevant product attributes.