Price discrimination is the strategy of selling an identical product to different buyers at different prices. In e-commerce, this is often based on user data, location, or browsing history. This intentional pricing strategy is a direct cause of deviations from the Law of One Price online.

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After conducting a price comparison for a standardized product online, analyze the degree to which the Law of One Price is upheld. Propose potential reasons for any observed price variations among different online retailers.

Analyzing and Explaining Deviations from the Law of One Price Online

Price discrimination is a pricing strategy where a seller charges different prices for the same product to different buyers. This practice is feasible only when a firm possesses market power, can segment its customers by their willingness to pay, and can prevent resale (arbitrage) between the groups.

Price Discrimination

Price discrepancies for an identical product across different markets can persist due to transaction costs. These costs, which include shipping fees, currency conversion charges, and other expenses related to executing a trade, create a barrier to arbitrage. When transaction costs are higher than the potential profit from buying low in one market and selling high in another, the price gap is not closed, leading to a violation of the Law of One Price.

Transaction Costs as a Cause for Deviations from the Law of One Price

Price dispersion occurs when consumers lack complete information about all available prices for a product. If a consumer is unaware that a lower price exists, or if the effort to find it is too high, sellers can maintain higher prices without losing all their customers. This lack of perfect knowledge prevents the market from converging to a single price, causing a failure of the Law of One Price.

Imperfect Information and Price Dispersion Online

Price dispersion for identical products can be caused by non-price factors such as a retailer's reputation, quality of customer service, and return policies. Consumers are often willing to pay a premium to purchase from a more trusted or reliable retailer, even when a lower price is available elsewhere. This consumer preference for reputable sellers allows for price differences to persist, leading to deviations from the Law of One Price.

Retailer Reputation and Price Dispersion

Governmental levies like sales taxes, value-added taxes (VAT), and import tariffs create price differences for the same product across different regions or countries. These legally mandated costs prevent prices from equalizing, leading to violations of the Law of One Price.

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