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ABSTRACT:
The market values of online platforms, such as Yahoo, stem from their ability to monetize the clicks they generate for firms advertising on their sites. We exploit a unique dataset on clicks from one of Yahoo's price comparison sites to estimate the determinants of clicks received by online retailers. We find that a firm enjoys a 60% jump in its clicks when it offers the lowest price at the site. This discontinuity is consistent with a variety of models that have been used to rationalize the price dispersion observed in online markets. We also show that one may use estimates of the determinants of a firm's clicks to obtain bounds on its underlying demand parameters, including own- and cross-price elasticities. Our results have potentially significant ramifications for online retailers, platforms, and policymakers: Failure to account for discontinuities distorts parameter estimates by 50 to 100 percent.

SUGGESTED CITATION:
Michael R. Baye, J. Rupert J. Gatti, Paul Kattuman, and John Morgan, "Clicks, Discontinuities, and Firm Demand Online" (November 1, 2006). Competition Policy Center. Paper CPC07-074.
http://repositories.cdlib.org/iber/cpc/CPC07-074