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Search Ability and Price Dispersion in Online Markets
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Dr Stephen McDonald
Professor Colin Wren
McDonald S, Wren C
Oxford Bulletin of Economics and Statistics
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The paper examines the link between price dispersion and search ability taking the case of the UK Internet motor insurance market. The modelling of an insurance market shows that the standard result of a negative relationship between search and price dispersion holds in the presence of risk, but only at higher levels of search. The paper takes monthly price data from motor insurance websites for five car types and twenty-two individual types over a one-year period. The individual characteristics of age, occupation and sex serve as proxies for search ability. The empirical results suggest that search ability has a negative effect on price dispersion, which is not compatible with alternative explanations such as the propensity to search and Internet access. Overall, online price dispersion is lower for the young and employed, which is consistent with these types having greater search ability.
Submitted 11 July 2013; Revised paper submitted 23 June 2014
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