Price dispersion and pandemics

Price dispersion is an excellent indicator of transactional frictions. It isn’t that absent price dispersion, we can confidently say that frictions are negligible. Frictions can be substantial even when price dispersion is zero. For instance, if the search costs are high enough that it makes it irrational to search, all the sellers will price the good at the buyer’s Willingness To Pay (WTP). Third world tourist markets, which are full of hawkers selling the same thing at the same price, are good examples of that. But when price dispersion exists, we can be reasonably sure that there are frictions in transacting. This is what makes the existence of substantial price dispersion on Amazon compelling.

Amazon makes price discovery easy, controls some aspects of quality by kicking out sellers who don’t adhere to its policies and provides reasonable indicators of quality of service with its user ratings. But still, on nearly all items that I looked at, there was substantial price dispersion. Take, for instance, the market for a bottle of Nature Made B12 vitamins. 

Prices go from $8.40 to nearly $30. It is not immediately clear why sellers selling the product at $30 are in the market. It could be that the expected service quality for the $30 seller is higher except that between the most expensive and the next lowest price seller, the ratings of the next highest seller are lower. And I would imagine that the ratings (and implied quality) of Amazon, which comes in with the lowest price, are the highest.

p.s. Sales of the boxed set of Harry Potter show a similar pattern.

That is all from Gaurav Sood.

Comments

Have long seen the same phenomenon with books, used and new.

My guess is that the high price offerer is patient, willing to wait for a non-searcher.

+1 very common in developing countries even Greece. A guy will put a "For Sale" sign in their car, with really no intention of selling the car, unless some 'sucker' really wants to buy it and is too lazy to negotiate. Another one: lots of old people in Greece who don't want to travel for a bargain so there's a market catering to this 'captive' audience, selling them overpriced goods that are convenient. Another one: the 'rotten produce' is always the easiest produce to grasp in a grocery shelf, i.e., it's up close, in the front row, where granny can grab that Granny Smith apple. A high-reputation store can paradoxically be a market for lemons, trading off their good will (Whole Foods was like this before Amazon acquired them). Another one: Amazon 'one-stop' shopping means you'll get a lot of overpriced stuff (often bought at Walmart and resold to Millennials who think Amazon is so great and refuse to be seen dead in a Walmart or flea market).

There are Millennials that sing praises to shopping on the cheap. Take "Thrift Shop" by Macklemore:

https://www.youtube.com/watch?v=QK8mJJJvaes

What about the time value of consumption? Amazon offered almost immediate consumption, but not now: what I could consume in a day is now delayed by 30 days or more. For some goods, 30 days is an eternity, now that I'm working at home, such as a new computer. Then there's hand sanitizers and toilet paper and soap, any number of goods that are not immediately available. I assume Cowen would approve a price based on supply and demand. And that Cowen would approve of arbitrage (i.e., market imperfection). I believe in markets, so I don't understand why the price of toilet paper hasn't spiked. Is that a market failure?

That's a serious question, and problem. Long, long time ago, I believe it was Harald Demsetz, who stated that firms set prices with a view to the future. Now here's my memory and paraphrasing and making stuff up: If prices turn out to be wrong later, the firm will not change price to preserve its reputation.

The truth in this today is that "brokers" buy low and sell high. Prof. Tabarrok on this blog noted that this is only half good, for the producer doesn't benefit form the price kick, only consumer rationing is made more efficient.

Alas, if this is true, it would constitute a market failure! I don't know how to fix it, at the moment.

Some sellers are selling fakes.

+1 as one (of multiple) factors.

This was (is?) especially true for cologne on Amazon. I speak from personal experience.

Quality control is more suspect for third party sellers, but even “Shipped and Sold by Amazon” is no guarantee. This is not always/everywhere rooted out because not all products are fake (some are acquired from bought-out companies) and not all reviews are authentic (some are also bought).

I recommend fakespot.com to weed out fake reviews, but there are other sites. Buyer beware.

Isn't this the same thing with order books on a stock exchange? There are buyers and sellers at a wide range of prices.

The book analogy certainly is the same in that both are offered at a wide range of prices. And both are in fixed supply, at least for the moment. Only some quantity is transacted at any moment.

The stuff that's "in short supply" at the moment -- tests, masks, god knows what -- can all be reproduced, quickly, actually. Here, one would expect the "Law of One Price" to hold virtually instantaneously and hence, promote production.

Apparently, the Law of One Price is the Law of the Wrong Price. Again, I do not know how to fix this.

I thought of an order book also or, for those that are more economically rather than financial market minded, a supply curve. Both comprise a schedule of offering prices and corresponding quantities. In normal times and for common consumer goods, quantities offered at the "Best Offer" probably exceed quantity demanded on a short time scale. There's ample liquidity (for buying anyways) in trading parlance, so one might see prices only at or near the Best Offer as sell orders at significantly higher prices are unlikely to get filled. In unusual times such as these, quantity offered at the Best Offer may be insufficient to meet short-term liquidity demands so others may start displaying offers to sell at higher prices. Still, insufficient liquidity is a form of "transactional friction". (Indeed, one of the biggest sources of transaction costs in financial markets is so-called price impact, which refers to moving up the supply curve when one wants to buy a larger quantity than what is offered at the Best Offer price.) So, Gaurav Sood's point still stands: price dispersion could be an indicator of "transactional frictions", whether the friction is limited liquidity or search costs.

I did some back of the envelope research on the effect of Free Delivery where delivery was included, and where delivery was separate, but when you added in the delivery charge, the price was still less than the Free Delivery.

One of the items is the concept of Free. We are attracted to it, because, there is no cost to free. Right

Wrong.

Part of the explanation is that you have to click through to find other vendors who offer the lower price, but, it is on a second page, where new and used items are sold, and, consumers are lazy and in the habit of limiting search.

Try it yourself.

Typically those items take much longer to ship than Amazon's (at least until a couple weeks ago) next-day delivery. For many items it is worth paying another $1 to get it a week earlier.

Because vitamins are veblen goods, bought by people who vary from the informed who need them, to people searching for snake oil?

And that 'quality' enforcement from Ebay might prevent you from getting sick from taking them, but I doubt that enforcement distinguishes between good or great quality supplements. I think there's even been a few expose's about how even famous brand supplements can have very bad quality control. Buyers may hold strong opinions about that.

Oh, I know the answer to this one!

It’s (often) because the $30 bottle of vitamins is listed at $30 by a seller with nothing to lose and everything to gain.

Nothing to lose = It costs nothing to list something on Amazon at an inflated price. You don’t even need to have the item in inventory; when it’s bought, just buy it in turn from a lower-priced seller (on Amazon or Walmart or a Chinese site) and ship it from that seller to your buyer. Instant arbitrage. This can be automated, requiring little or no human time. Many people make money this way online arbitraging one website (like Walmart) to another (like Amazon).

Everything to gain = There’s a decent enough chance that a buyer will find the (inflated) $30 listing and purchase it anyway. Maybe they think the higher price is a sign of true quality. Maybe the didn’t see a lower price. Maybe they’re using the company credit card, so the money isn’t coming out of their pocket, but they earn points or miles for every purchase.

And also the opposite - sometimes you'll see something at a significantly lower price than the competition and - oooops, out of stock. Too bad.

That was my instinctive guess about the solution to the mystery.

Could just be a mistake, people make mistakes all the time. The real question would be what is the frequency of these high prices, if just one seller out of thousands is posting high prices, it is probably not significant.

There are probably a number of those magazines being sent to the Joe Biden address.

The skewed price dispersion is explained by the fact that there are vast numbers of people deluded into thinking that higher price indicates higher quality, making the same mistake as when they choose medical care.

I don't see any references to any pandemics. Amazon has had these price dispersions well before this latest crisis.

https://www.zerohedge.com/health/covid-19-saving-lives

COVID-19 Is Saving Lives
---
I showed a reference that tells us 60,000 fewer people die during recessions. This reference proves that stat once again for this year, total deaths down. Fewer work related accidents likely.

But we were about to have a recession anyway, didn't need a virus to save lives.

So, if Trump is to be trusted (yes, that was a joke), only 40,000 net Americans will die, subtracting 60,000 suicides from 100,000 covid victims?

The analysis seems flawed. Assume that the higher priced sellers are waiting for the lower priced sellers to stock out. Should be rational as long as there is a cost to updating your price. Here an attention cost.

This. Additionally, the sellers may list the item in a brick-and-mortar or on other marketplaces and know that they can sell it somewhere for that higher price.

Right. I'm shocked at how many people are confidently giving the wrong suggestion. I've seen this work for sellers on many occasions. A product is suddenly in high demand and the sellers who are trying to get the everyday sales are sold out while the others make a 5x markup.

You want price dispersion? Try health insurance. Prices are going to jump 40% thanks to COVID-19. Trump failed numerous times to fix healthcare and it is still broken 4 years into his term.

https://www.nytimes.com/2020/03/28/health/coronavirus-insurance-premium-increases.html

This phenomenon has been pointed out for years.

Some of it seems to be other points discussed in the comments here: hoping to take advantage of buyer inattention or perhaps occasional out of stock situations.

For some products, it seems to take advantage of a very specific form of buyer confusion (or lack of detailed attention) about search results: products sold in different sizes or multi-packs. At a glance for a buyer, the price level can appear to be the lowest on offer for a 4-pack (or whatever specific number) of a product, when it's actually a wildly overpriced single quantity sale. It doesn't sound like that's the case with these vitamins.

'Sniping' bots that undercut rivals are brilliant against non-algorithmic rivals, but lead to Bertrand competition if the rival has the same software.

Because of the system's latencies, sellers have worked out that a good strategy is to undercut if price above X, but if it's low enough, price very high in order to drag your rival's bot higher next time they update.

Here's some interesting background, although in this case the parties' directly emailed eachother to agree pricing update truce, rather than adopting the drop and jump pricing.

https://www.gov.uk/cma-cases/online-sales-of-discretionary-consumer-products

Another source of the price dispersion is that some sellers simply lack the energy and technical nous to maintain frequent price updates. Since bots/energetic rival sellers run rings around them if they price low, the best they can do is price consistently high and wait for suckers/short-term demand spikes.

Finally, it's interesting that Amazon consistently prices significantly higher than a lot of other online retailers, because of the reduced transaction frictions/fraud and quality risks.

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