Trade and shopping

Trade and shopping

Eric Schmidt, a former CEO of Google, said in 2012 that the web will dissolve national barriers. While we wait to see what is going to be left of national borders in the future, the rising importance of e-commerce can already help economists understand the nature of frictions in international trade.

Online markets have unique qualities. For example, the physical cost of changing prices is negligible for internet retailers, and therefore internet prices could be fluctuating every week, day or minute in response to shifting demand and supply conditions. Searching for best online prices for very narrowly defined goods is particularly cheap and simple as consumers do not need to travel anywhere, buyers can establish the distribution of prices with just a few clicks, and pressure for price convergence is especially strong with ubiquitous price comparison websites. More generally, the geographical location of consumers and stores is largely irrelevant in e-commerce, and therefore administrative borders and similar frictions are likely to play a much more limited role.

Strikingly, while the law of one price is an appealing concept, the vast majority of research has emphasized frictions that prevent the law from holding over relative long periods. These frictions can take a variety of forms, but the most popular barriers leading to violations of the law are search costs, costs of nominal price adjustment and transportation costs. Assessing the contribution of these frictions has been remarkably difficult as they are ubiquitous in standard markets with brick-and-mortar shops.

New evidence for frictions and price adjustment in online markets

Fortunately, in a highly integrated market with low frictions of price adjustment, easy search and price comparisons, and limited influence of geographical barriers, you can rule out some popular explanations of the puzzle and narrow down the set of plausible theories. In our recent paper, we use internet prices in the US and Canada for a broad array of products to provide new evidence on the nature and sources of frictions in price adjustment and departures from the law of one price.

For almost five years (2008-13) we scraped prices and other relevant information from a leading price-comparison website. The data includes each good’s unique identifier (similar to barcodes in the scanner price data), each good’s description, prices for each seller, each seller’s unique identifier, the number of seller reviews, the ranking of seller quality, reviews of goods, etc. The dataset covers a broad range of goods sold online, including software, computer parts, electronics and others. We have collected information for more than 140,000 goods and more than 11 million price quotes.