Competition in Online Comparison Shopping Services

Abstract

Retail markets in online comparison shopping websites are extremely competitive, yet firms voluntarily list in these services. The objective of this paper is to study competition and seller profitability in comparison shopping markets. In the proposed model, two profit-maximizing sellers sell a homogeneous good to Bayesian risk-neutral buyers. Buyers use a reputation system to update their beliefs about the sellers and purchase from the seller that maximizes the buyer’s expected surplus. The model shows that a seller’s profit depends on the distribution of buyer beliefs. A good reputation increases a seller’s profits. Empirical testing is carried out using data from Pricegrabber, a popular comparison shopping website. The evidence indicates that a good reputation may support price premiums as the model suggests.