We analyze how increased use of electronic channels affects geographic price variance by enabling buyers to shift demand across locations. Using data from the wholesale automotive market, we find that buyers use the reach of the electronic channels to shift purchases from highprice to low-price locations. This “arbitrage” reduces the variance of market prices, but not their means. Further, these relationships weaken with distance, due to transportation costs. The study contributes to the literature on how electronic trading affects geographic trade and price dispersion by: a) considering the role of geographic location in price dispersion, b) observing the behavioral mechanism (buyer arbitrage across locations) that leads to lower price dispersion, c) analyzing dispersion when prices are determined by auction rather than fixed price, and d) examining how reduced buyer search costs have led to lower price dispersion throughout the entire market, as opposed to only the online or offline components.
Overby, Eric and Forman, Chris, "The Market is Flat (or is it?) The Effect of Electronic Trading on Buyer Reach, Geographic Transaction Activity and Geographic Price Variance" (2009). ICIS 2009 Proceedings. 55.