Review of Industrial Organization 20: 283–289, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Price Dispersion and Price Discrimination:
Empirical Evidence from a Spot Market for Water
DAVID W. YOSKOWITZ
Department of Finance, Economics & Decision Sciences, Texas A&M University – Corpus Christi,
6300 Ocean Drive, Corpus Christi, TX 78412, U.S.A.
Abstract. This note shows the existence of price dispersion and price discrimination in a spot market
for water. Several behaviors contributing to this dispersion/discrimination are found for both the
seller and buyer in this relatively competitive market, and examples are given of each. Using some
previous theoretical work, the common thread linking the differing behaviors is shown to be differing
levels of information and search costs.
Key words: Price discrimination, price dispersion, search costs, water market.
Price dispersion for ostensibly homogenous products and price discrimination in
an imperfectly competitive market are more common than microeconomic theory
generally postulates (see Dahlby and West, 1986; Adams, 1997; Pratt et al., 1979,
for example). Price dispersion may exist because of spatial and/or informational
asymmertries, but may not necessarily lead to formal price discriminating prac-
tices. In markets that are at least competitive to some degree, price discrimination
still may exist due to the differences in search costs for consumers.
This note examines the existence of price discrimination and dispersion in a
spot market for water.
The analysis is unique because it explores the market for
raw water, and because raw water is a perfectly homogenous good. The impetus
for this work stems from analysis of Adams (1997), which looked at search costs
and price dispersion for homogenous products. Although his work dealt with items
sold at convenience stores, the hypothesis that search and information costs for
The author would like to thank David Hudgins, Mike Pisani, the anonymous referees, and the
editor for their helpful comments and suggestions.
Even early economic analysis suggested that high search costs on the part of consumers led to
non-competitive conditions. Edwin Chadwick’s examination of funeral services in England in the
1800s gave examples of this behavior (see Chadwick, 1859; Ekelund and Ford, 1997; Ekelund and
Hebert, 1997, for a discussion of this market).
If discrimination exists, then the dispersion of prices around a mean will exist. However the two
cannot be used interchangeably.