2015 Series • No. 15–1
Research Department Working Papers
Price Setting in Online Markets: Does IT Click?
Using a unique dataset of daily U.S. and U.K. price listings and the associated number of clicks for precisely defined goods from a major shopping platform, this paper explores how prices are set in online markets, which have a number of special properties such as low search costs, low costs of monitoring competitors' prices, and low costs of nominal price adjustment. High-quality data are not only useful to estimate price rigidity and other properties of price adjustment in online commerce but also allow comparing the behavior of those properties with estimates available from brick-and-mortar stores.
- Online prices (especially prices with a large number of clicks) are more flexible than prices in conventional stores. Yet, despite the power of the internet, the behavior of online prices is consistent with smaller but still considerable frictions, calling into question the validity of popular theories of sticky prices and, more generally, price setting. These frictions include stickiness, low synchronization of price changes both across and within sellers, large cross-sectional price dispersion, and low sensitivity to predictable and unanticipated fluctuations in demand.
- The degree of price rigidity is smaller when markets are more competitive: with a larger number of sellers, the frequency of price changes increases and the median size decreases.
- Sales in online markets are about as frequent as sales in conventional stores, but the average size of sales is considerably smaller.
- Despite differences in the markets of the United States and the United Kingdom, price setting is largely the same in the two countries.
- Qualitatively, the patterns of price setting and adjustment are similar to those observed for offline prices, a finding that suggests a need for more research on the sources of price rigidities and dispersion.
These findings have a number of implications. First, even if e-commerce grows to dominate the retail sector, price stickiness is unlikely to disappear because it does not seem to be determined exclusively by search costs and/or physical costs of changing a price sticker. Second, one should not disregard the effect of e-commerce on properties of the aggregate price level and inflation, as pricing in online markets does differ from that in brick-and-mortar stores. Third, macroeconomists should put more effort into developing theoretical models with alternative mechanisms generating price stickiness and other imperfections, as the standard macroeconomic models of price rigidities, which emphasize menu costs and search costs, are likely incomplete. Finally, it appears that much can be learned from studying the price-setting of sellers that have a presence in both online and offline markets, as well as from more complete information about online sellers' inventories and costs.
Using a unique dataset of daily U.S. and U.K. price listings and the associated number of clicks for precisely defined goods from a major shopping platform, we shed new light on how prices are set in online markets, which have a number of special properties such as low search costs, low costs of monitoring competitors' prices, and low costs of nominal price adjustment. We document that although online prices are more flexible than offline prices, they nevertheless exhibit relatively long spells of fixed prices, large size, and low synchronization of price changes, considerable crosssectional dispersion, and low sensitivity to predictable or unanticipated changes in demand conditions. Qualitatively, these patterns are similar to those observed for offline prices, a finding that suggests a need for more research on the sources of price rigidities and dispersion.