Search, Obfuscation, and Price Elasticities on the Internet

Authors

  • Glenn Ellison,

    1. Dept. of Economics, Massachusetts Institute of Technology, E52-380, 50 Memorial Drive, Cambridge, MA 02142-1347, U.S.A. and NBER; gellison@mit.edu
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  • Sara Fisher Ellison

    1. Dept. of Economics, Massachusetts Institute of Technology, E52-274B, 50 Memorial Drive, Cambridge, MA 02142-1347, U.S.A.; sellison@mit.edu
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    • We would like to thank Nathan Barczi, Jeffrey Borowitz, Nada Mora, Youngjun Jang, Silke Januszewski, Caroline Smith, Andrew Sweeting, and Alex Wolitzky for outstanding research assistance. We also thank Patrick Goebel for a valuable tip on Internet data collection, Steve Ellison for sharing substantial industry expertise, and Drew Fudenberg, the co-editor, and three anonymous referees for their comments. This work was supported by NSF Grants SBR-9818524, SES-0219205, and SES-0550897. The first author's work was supported by fellowships from the Center for Advanced Study in the Behavioral Sciences and the Institute for Advanced Study. The second author's work was supported by fellowships from the Hoover Institute and the Institute for Advanced Study.


Abstract

We examine the competition between a group of Internet retailers who operate in an environment where a price search engine plays a dominant role. We show that for some products in this environment, the easy price search makes demand tremendously price-sensitive. Retailers, though, engage in obfuscation—practices that frustrate consumer search or make it less damaging to firms—resulting in much less price sensitivity on some other products. We discuss several models of obfuscation and examine its effects on demand and markups empirically.

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