TAILIEUCHUNG - SEARCH, OBFUSCATION, AND PRICE ELASTICITIES ON THE INTERNET

We examine the competition between a group of Internet retailers who operate in an environment where a price search engine plays a dominant show that for some products in this environment, the easy price search makes demand tremendously pricesensitive. 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. KEYWORDS: Search, obfuscation, Internet, retail, search engines, loss leaders, addon pricing, demand elasticities, frictionless commerce | Econometrica Vol. 77 No. 2 March 2009 427-452 SEARCH OBFUSCATION AND PRICE ELASTICITIES ON THE INTERNET By Glenn Ellison and Sara Fisher Ellison1 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 pricesensitive. 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. KEYWORDS Search obfuscation Internet retail search engines loss leaders addon pricing demand elasticities frictionless commerce. 1. INTRODUCTION When Internet commerce first emerged one heard a lot about the promise of frictionless commerce. Search technologies would have a dramatic effect by making it easy for consumers to compare prices at online and offline merchants. This paper examines an environment where Internet price search plays a dominant role small firms selling computer parts through . A primary observation is that the effect of the Internet on search frictions is not so clear-cut advances in search technology are accompanied by investments by firms in obfuscation. We begin with a brief discussion of some relevant theory. One way to think about obfuscation is in relation to standard search-theoretic models in which consumers do not learn all prices in equilibrium. Obfuscation can be thought of as an action that raises search costs which can lead to less consumer learning and higher profits. Another way to think about obfuscation is in relation to Ellison 2005 which describes how sales of add-ons at high unadvertised prices can raise equilibrium profits in a competitive price discrimination model. Designing products to require add-ons can thereby be a .

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