Price Dispersion in Consumer Markets: Theory, Empirical Evidence and Consumer Policy Impliactions

J.D. Forbes, University of British Columbia
[ to cite ]:
J.D. Forbes (1987) ,"Price Dispersion in Consumer Markets: Theory, Empirical Evidence and Consumer Policy Impliactions", in NA - Advances in Consumer Research Volume 14, eds. Melanie Wallendorf and Paul Anderson, Provo, UT : Association for Consumer Research, Pages: 570.

Advances in Consumer Research Volume 14, 1987      Page 570

PRICE DISPERSION IN CONSUMER MARKETS: THEORY, EMPIRICAL EVIDENCE AND CONSUMER POLICY IMPLIACTIONS

J.D. Forbes, University of British Columbia

Maynes and Assum (1982) called a consumer market informationally perfect when a single price is charged by all sellers for the same quality and informationally imperfect when different prices are charged for the same quality.

Theory from economics, information theory, and consumer behavior are used to provide some structure for the preliminary analysis of price dispersion in several consumer markets.

A number of researchers have found more price dispersion in consumer markets then can be accounted for by cost and information factors. Indeed, economic theory on the cost of collecting and analyzing information would predict price dispersion in all markets. It would be unusual if sellers did not take advantage of locational or other monopolies to charge prices which have within them monopoly profits. Information from a number of studies over the past four decades have shown that price is poorly correlated with quality (an average correlation of all studies is around .25).

An analysis of price dispersion for a number of consumer products in Vancouver, British Columbia are compared with price dispersion data reported by Maynes and Assum for several cities in the United States. Price dispersion in Vancouver was higher then in their earlier studies but this may be the result of differences in the definition of data collected. A regression analysis of the price dispersion data in Vancouver revealed relatively low correlations between price dispersion and price level, product class homogeneity, the number of brands in the market, and between durable non-durable and service type goods.

It is postulated that consumers search more or less depending on their perception of the dispersion of prices in their local markets. However, almost no studies of consumer perception of price dispersion have been found in the literature.

Areas for future research are outlined as are the implications of this research for consumer policy makers.

(I would like to thank Doyle Weiss for suggestions on performing the regression analysis and to Jaina Endicott for data preparation and analysis.)

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