Search and Price Dispersion in Online Grocery Markets

Prices for similar products often differ between retail outlets, leading consumers to actively search for products that meet their needs at the lowest possible price. Prices differ among retailers, and search intensity differs among consumers because search is a costly activity and consumers differ in their costs of search. How variety and the multiproduct nature of retailing affect search costs, search intensity, and the dispersion of prices, however, is not well understood. In this paper, we use online grocery pricing data from four retailers in the UK to estimate search costs and equilibrium price dispersions. When consumers search for single products, we find that variety reduces the cost of search and induces consumers to search less, which increases the pricing power of online retailers. However, when consumers search for multiple products, search costs still fall in variety, but consumers search more intensively across stores, potentially increasing the competitiveness of online retail markets.