Digital Strategy and Markets · Week 1

Search costs and price dispersion: the cost of one more price quote

Twenty shops sell the same product at different prices. A buyer checks one shop at a time, each extra check costs time or money, and the buyer follows Stigler's rule: keep checking while the expected saving beats the cost of one more check. Lower the cost of checking and watch the spread of prices people actually pay collapse. Then let sellers make comparison harder and watch the spread come back.

Baseline = 10, the offline world of phone calls and store visits. Search engines and comparison sites push this toward zero.
Fees revealed late, versioned bundles, confusing tariffs. Every point here adds to the cost of checking one more price.
Stigler's surprise: with costly search, adding sellers barely changes what buyers pay. Cheap search is what changes it.
Average price paid
–
 
Prices checked before buying
–
 
Spread of prices paid
–
 
Spent on searching
–
 
Total cost to the buyer
–
 
Seller margin
–
 
The cost of one more check drives this market. When checking is cheap, buyers compare many sellers, almost everyone finds a low price, and the spread of prices paid collapses. When checking is expensive, buyers stop early, high prices survive, and seller margins grow. Sellers understand this, which is why making comparison harder brings the spread back even after search itself has become free.