Do Internet Converge Prices to the 'Law of One Price'? Evidence from Transaction Data for Airline Tickets

Abstract

Internet presumably reduces search cost driving price to the competitive level. Evidence from empirical research quantifying dispersion in the electronic based markets has yield mixed results. More recent research has documented near zero dispersion in the electronic markets using transaction prices. This paper is one of only a handful of papers to examine the impact of internet on price dispersion using contemporaneous online and offline transaction data for airline ticket prices. The paper finds strong empirical evidence of lower dispersion in the electronic markets compared to the traditional markets, but fails to find evidence of near zero dispersion in the electronic markets, even with transaction prices. The results suggest that electronic markets exhibits significantly lower but positive dispersion, in contrary to the near zero dispersion as found in more recent empirical literature.