Working Paper: NBER ID: w20415
Authors: Michael Dinerstein; Liran Einav; Jonathan Levin; Neel Sundaresan
Abstract: 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.
Keywords: Consumer Search; Price Competition; E-commerce; Search Frictions; Platform Design
JEL Codes: D12; D22; D47; D83; L13; L86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| search frictions (F12) | positive markups (D43) |
| search frictions (F12) | price dispersion (L11) |
| increase in number of relevant offers shown to consumers (D16) | enhance price sensitivity (D49) |
| increase in number of relevant offers shown to consumers (D16) | increase competitive pressure among sellers (D43) |
| narrowing the number of listings shown to consumers (L81) | increase price competition (D41) |
| redesign of eBay's search process (D44) | decrease in transaction prices (D44) |
| redesign of eBay's search process (D44) | shift in purchasing behavior toward lower-priced offers (D16) |
| redesign of eBay's search process (D44) | increase in number of relevant offers shown to consumers (D16) |
| search design (C90) | higher purchase rates for differentiated products (L15) |