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Price Partitioning and Consumer Rationality in Internet Retail Markets

By Katherine Bodnar

This paper seeks to further understand the bounds of consumer rationality and search on the Internet. Specifically this paper focuses on how consumers respond to partitioned prices when making their purchasing decisions. The goal of the paper is to determine if consumers are as sensitive to explicitly stated shipping prices, as they are to list prices, in an environment where items are sorted by list prices. After evaluating the data using a non-linear regression model, the results suggest that consumers do not weight partitioned prices (taxes or shipping prices) as much as they do list prices, contradicting the standard economic model about consumer rationality. The results imply that price partitioning is an effective obfuscation method that is allowing retailers to continue to maintain mark-ups and profit margins in Internet settings.

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Advisor: Andrew Sweeting | JEL Codes: L1, L11, L81 | Tagged: E-­‐Commerce, Obfuscation, Price Partitioning, Retail Competition, Search, Shipping Price

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