Essays on price dispersion, service quality and advertising fees

This dissertation investigates the sources of price dispersion in a homogeneous product market and examines the profit-maximizing advertising fees that price comparison sites charge firms that advertise through their platforms. In the first essay, the main findings are a single click-through fee generates greater revenue for the price comparison website than either a flat fee or a combination of both a click-through fee and a flat fee. The predictions of our model are consistent with the observed advertising fee practices of the major price comparison websites today. The second essay consists of two parts. First, motivated by the fact that major price comparison websites include store service ratings, I write a clearinghouse model in terms of utility and show it is optimal for firms to draw deals from a symmetric utility distribution. If firms are heterogeneous in their service levels, the equilibrium will result in asymmetric pricing strategies. Second, I use daily price data collected from a leading price comparison website to show that prices, accounting for service premiums, are more consistent with our model prediction than existing models. Consumers find it difficult to learn which stores persistently offer the best deal over time. In the third essay, I structurally estimate the parameters of the proposed theoretical model.