Search, obfuscation, and price elasticities on the Internet

the long version

We examine the competition between a group of Internet retailers that operate in an environment where a price search engine plays a dominant role. We show that for some products in this environment, the easy price search makes demand tremendously price-sensitive. Retailers, though, engage in obfuscation - practices that frustrate consumer search or make it less damaging to firms - resulting in much less price sensitivity on some other products. We discuss several models of obfuscation and examine its effects on demand and markups empirically. Observed markups are adequate to allow efficient online retailers to survive. Keywords: search, obfuscation, Internet, retail, search engines, loss leaders, add-on pricing, website design, demand elasticities, frictionless commerce. JEL Classifications: L8, D4, M3.