Project description
New empirical models to understand price dispersion
It is not uncommon for products with the same characteristics to be purchased at different prices by different individuals. Price dispersion represents a major concern for consumers. The EU-funded PRIDISP project will analyse the different sources of price dispersion. It will extend standard empirical models of price determination to incorporate price dispersion. These new models, estimated with data on products’ sales and prices, will be used to understand the reasons for price dispersion, as well as to quantify the impact of price dispersion for consumer welfare and firms’ profits. Such analysis will be performed using data from the automobile market, grocery purchases and online retail markets.
Objective
Structural models of demand and supply in differentiated product markets are widely used for policy evaluation and in antitrust. They typically consider firms set uniform prices and fail to explain price dispersion within products. Yet, it is common that the same good is purchased at different prices and this has major consequences for consumers that standard models cannot analyze. This proposal extends standard models to incorporate price dispersion. These new structural models are used to shed lights on the sources of price dispersion, their importance and evaluate the distributional impacts and profitability of price dispersion on important markets (automobile, grocery items and online markets).
We model and analyze specific sources of price dispersion. First, we consider price dispersion within product lines and the pricing of quality with a model of second degree price discrimination. Second, we develop a model of third degree price discrimination with limited arbitrage opportunity. When price discrimination is not explicit, consumers are not locked in and some individuals are able to arbitrage and pay the lowest price. The third project considers individualized pricing and purchase history and develops a structural model in which firms learn about consumers’ preferences by observing their previous purchase patterns and leverage this information by setting individualized prices. Finally, we consider a framework with spatial price dispersion to analyze price dispersion for grocery items across locations. As a transversal project, we provide a reliable method to test alternative models of market equilibrium and apply them to confront our new models to the standard ones.
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Funding Scheme
ERC-STG - Starting GrantHost institution
31080 Toulouse
France