@article{4a05249a3c1c48e2a4da59c867876e1e,
title = "Firm strategy and biased decision making: The price dispersion puzzle",
abstract = "This article confronts the empirical evidence and theoretical predictions about the correlation between price dispersion and price. Theoretically, search and location differentiation models suggest that price dispersion is a function of search and transportation costs, but is independent of the good's price. Empirical evidence, however, suggests otherwise: price dispersion and price are strongly correlated. This article points out the discrepancy between theory and evidence, which it denotes as 'the price dispersion puzzle'. It then explains why the documented behaviour of relative thinking (people behave as if their search or transportation costs are increasing in the good's price) can solve the puzzle.",
keywords = "Behavioural economics, Consumer behaviour, Price dispersion, Pricing, Relative thinking",
author = "Azar, {Ofer H.}",
note = "Funding Information: The author thanks Gadi Barlevy, Colin Camerer, James Dana, Stefano DellaVigna, Ernst Fehr, Daniel Friedman, David Laibson, George Loewenstein, Ulrike Malmendier, Robert Porter, William Rogerson, Dan Sasaki, Yossi Spiegel, Matthijs Wildenbeest, Asher Wolinsky and an anonymous referee for their valuable comments and discussions. I am also grateful for the comments made by participants in the Urrutia Elejalde Foundation – UNED fourth Winter Workshop {\textquoteleft}Psychological Foundations of the Theory of Choice in Economics{\textquoteright}, SABE/IAREP 2004, the Econometric Society World Congress 2005, IAREP 2005, EARIE 2006, the 23rd Israel Economic Association Annual Conference, IIOC 2008, SABE/IAREP 2008, LABSI 2008 International Conference on Strategic Decision Making in Politics and Economics, and seminars at Northwestern University, The Hebrew University of Jerusalem, The Interdisciplinary Center Herzliya, The Technion – Israel Institute of Technology, the University of Haifa, Tel Aviv University, Ben-Gurion University of the Negev, Bar-Ilan University and the University of Tokyo. I also thank Severin Borenstein and Fiona Scott Morton for the data on airline prices. Financial supports from The Center for the Study of Industrial Organization at Northwestern University and from The Phillipe Monaster Center for Economic Research at Ben-Gurion University of the Negev are gratefully acknowledged.",
year = "2013",
month = mar,
day = "1",
doi = "https://doi.org/10.1080/00036846.2011.613778",
language = "American English",
volume = "45",
pages = "901--910",
journal = "Applied Economics",
issn = "0003-6846",
publisher = "Taylor and Francis Ltd.",
number = "7",
}