Search and Price Dispersion in Online Grocery Markets

Résumé

Retailers often sell multiple products and set prices that differ from the prices available at rivals, creating multiproduct incentives for consumers to search. In this paper we consider how product variety affects consumer search intensity and the dispersion of prices in multi-product retail markets. We employ online grocery pricing data from four retailers in the UK to estimate search costs and equilibrium price dispersion for food products under circumstances where: (i) consumers search for single products; and (ii) consumers search for multiple products at once. When consumers search for single products, we find that greater product variety reduces the cost of search and induces consumers to search less, thereby increasing the pricing power of online retailers; however, when consumers search for multiple products, we find that increased product variety reduces search costs but that consumers engage more intensively in multi-product search. Our results suggest that consumers’ ability to multi-product search reduces retailer market power and facilitates increased retail competition.