Incumbency Advantages: Price Dispersion, Price Discrimination, and Consumer Search at Online Platforms

Abstract

When lower prices are available only to consumers who search, firms can price discriminate based on search. We study local German electricity retail markets in which nonsearching consumers pay the incumbent’s baseline tariff. To observe other prices, consumers access an online platform. Pricing and search patterns differ substantially across local markets. Using panel data, we show that in local markets with more search, incumbents have higher baseline tariffs, while incumbents’ and entrants’ online tariffs are lower. In a theoretical model, we discuss when an incumbent has an incentive to differentiate tariffs and the welfare properties of banning such price discrimination practices.