NCPA - National Center for Policy Analysis

Why Prices Vary for the Same Products

July 9, 2015

For many years, economists have observed substantial and pervasive price dispersion -- wide variations in price for the same product. Some economists have attributed price dispersion to "ignorance in the market," a lack of information among buyers and sellers.  More recently, economists at the Richmond Fed and the University of Pennsylvania have developed a model that combines price dispersion theory with intertemporal price discrimination theory to suggest that buyers' differing ability and willingness to shop around might explain price dispersion.

An older model imagines a market for an indivisible good. On the demand side, some buyers purchase the good from only one seller, while other buyers shop around.  In addition, some buyers shop only during the day, while others shop during the day and during the night. On the supply side, there are identical sellers, and each seller can vary the daytime and nighttime price of the good. (In describing their model, Menzio and Trachter use "daytime" as shorthand for convenient times and "nighttime" as shorthand for less-convenient times.)

A newer model attributed only 10 percent of the overall price dispersion they found to the relative "expensiveness" of stores. They attributed the remaining 90 percent — in roughly equal shares — to differences in prices across comparable stores and to variations in prices within the same store. They further concluded that households with fewer employed members pay lower prices because they have more time to shop around and because the opportunity cost of time is generally lower for people who are unemployed or retired.

Source: Karl Rhodes and Nicholas Trachter, "Buyers' Ability and Willingness to Shop Around: An Explanation for Price Dispersion," Federal Reserve Bank of Richmond, July 2015.

 

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