Price Setting and Price Discovery Strategies with a Mix of Frequent and Infrequent Internet Users

In this paper we develop an analytical model that characterizes the structure of price dispersion observed in electronic markets. Findings of our model are consistent with empirical evidence in these e-markets. We show that when different types of buyers' have different search costs, firms follow noncompetitive pricing strategies. Also, our model shows that price dispersion may actually increase if search costs falls, challenging the common belief that price dispersion decreases as search costs fall. We derive multiple price dispersion equilibria, with differing levels of welfare implications. These results are generated without the need for assumption of asymmetric information, and heterogeneity amongst buyers and/or firms. Our results show that the process of search alone may generate price dispersion, and highlight the importance of processes of search not only on prices, but also on the efficiency of e-markets