Mixed pricing in online marketplaces

A rich theory literature predicts mixed strategies in posted prices due to standard price discrimination, search frictions, and various other rationales. While typically interpreted as implying occasional sales or price dispersion, online marketplaces enable a firm to truly use randomization as a to...

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Bibliographic Details
Published in:Quantitative marketing and economics 2016-06, Vol.14 (2), p.129-155
Main Authors: Seim, Katja, Sinkinson, Michael
Format: Article
Language:English
Subjects:
Business and Management
Competition
Consumers
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Finance
Insurance
Management
Marketing
Postal codes
Prices
Statistics for Business
Trends
Websites
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Summary:A rich theory literature predicts mixed strategies in posted prices due to standard price discrimination, search frictions, and various other rationales. While typically interpreted as implying occasional sales or price dispersion, online marketplaces enable a firm to truly use randomization as a tool in pricing, and so such behavior should be expected to arise in online settings. We investigate a case of mixed pricing across a large subset of products on a major e-commerce website. We first test for randomizing behavior, and then construct a model of price discrimination that would generate randomization as optimal behavior. We estimate the model and use it to assess pricing effects of a proposed merger in the industry.
ISSN:1570-7156
1573-711X
DOI:10.1007/s11129-016-9168-3