Draft: Comments Welcome The Impact of Shopbot Use on Prices and Price Dispersion: Evidence from Online Book Retailing

The growth of Internet price search tools, notably shopbots, has reduced consumers’ search costs, allowing consumers to easily become informed of price and product characteristics among competing sellers online. While a variety of analytic models predict that increased consumer search through shopbots will lower price levels among competing retailers, there is no consensus in the empirical literature as to whether price dispersion will increase or decrease in response to increased consumer search through shopbots. Moreover, there are no papers that have analyzed this question using direct observation of variation in shopbot use over time. This paper seeks to examine the impact of changes in shopbot use over time on pricing behavior in the Internet book market. Using price data obtained from a leading shopbot, combined with clickstream data on shopbot usage from August 1999 to July 2001, we show that an increase of 1% in shopbot use is correlated with a $0.41 decrease in price levels, after controlling for book characteristics and the market competition condition. We also show that price dispersion decreases with shopbot use nonlinearly. This relationship is robust when we control for potential simultaneity bias and the possible influence of prominent retailers, bestsellers, holiday effect, and online book industry structural changes.