Price dispersion

In an earlier post, I said I was puzzled to see the same book offered at different prices on the same web site.

It turns out that versions of this effect are very well known to economists and occur in all markets. This is what one calls price dispersion. Electronic commerce brings up particularly interesting versions of this effect. Even in a more classical economic setting, many labor economics problems had a similar flavor, e.g., dispersion of wages and inability of some job markets to clear. There are entire books on the economics of search. Incidentally, some of the tools used to understand these processes are already familiar to me in other forms – bandit problems, dynamic programming, etc. However, the economic interpretation of the subtleties of these processes is something I had not known anything about.

I am still amazed at dispersion within a single, seemingly very transparent, market – the web page associated with external sellers of a single book on Amazon.  This is not really the imperfect information scenario where the dispersion effect seems intuitive. Perhaps one might talk about service level differentiation, but we’re talking about a single book that is going to be shipped to my work address – not something like fine dining. Curious…

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