Equilibrium Price Dispersion with Online Search

This paper studies how consumers' online search behavior may trigger pervasive and persistent online price dispersion. We set up a game-theoretic model to examine the oligopolistic price competition, given the two unique features of online search, namely, the existence of a common search ordering and shoppers who have non-positive search cost. We show that in absence of further heterogeneity, the unique online search behaviors alone can drive significant level of price dispersion. Specifically, we derive two-dimensional price dispersion, with both temporal fluctuation and spatial variation. We show that equilibrium price expectation monotonically decreases in line with consumers' search ordering. We also uncover a unique format of equilibrium pricing with stair-like sequence of price supports and localized price competition.