Review of Industrial Organization
12: 801–808, 1997.
1997 Kluwer Academic Publishers. Printed in the Netherlands.
Search Costs and Price Dispersion in a Localized,
Homogeneous Product Market: Some Empirical
A. FRANK ADAMS, III
Department of Economics and Management, Gustavus Adolphus College, St. Peter, MN
Abstract. Convenience stores provide an opportunity to compare the price dispersion that occurs
for gasoline, which is characterized by relatively low search and information costs to consumers,
with that of in-store items, which are characterized by relatively high search and information costs to
consumers. The results obtained from this study support the hypothesis that differences in search and
information costs for consumers play a signiﬁcant role in explaining the observed price dispersion
that occurs for homogeneous items sold at convenience stores.
Key words: Information costs, price dispersion, search costs.
Price dispersion is a
in the market (Stigler, 1961, p. 214).
It is the rule,ratherthan the exception,thatprices, even for seeminglyhomogeneous
products, exhibit a certain degree of dispersion in retail markets. This price dis-
persion occurs for several reasons, among which are informational and locational
asymmetry. Informational asymmetry between sellers and would-be buyers cou-
pled with costly production of information about prices generates price dispersion.
Locational asymmetry refers to homogeneous or nearly homogeneous products
that are sold by ﬁrms not located in the same vicinity (same block or area of town).
Consumers may be aware of the prices charged for products by different retailers,
but choose to buy from a particular retailer whose price is higher for a certain
product, due to convenience of location. In this case, the opportunity cost of time,
as well as the actual cost of transportation, overwhelms any savings that are likely
to result from the consumer’s purchasing the product from retailers at more distant
This paperfocuseson the price dispersionthat occursfor homogeneousproducts
sold at convenience stores in a speciﬁc locality.
Convenience stores are unique
among retailers in that the price of three products, the three grades of gasoline, are
The convenience stores surveyed are in the Auburn/Opelika Alabama city limits.