Buyer Subsidies in an Equilibrium Model of Price Dispersion
AbstractWe present a model of equilibrium price dispersion in which a per-unit subsidy to buyers can reduce average prices. The reason is that subsidies have two effects on average prices that work in opposite directions. First, subsidies raise buyers' willingness-to-pay, and by itself this causes firms to charge higher prices. However, since a higher willingness-to-pay lowers the relative cost of search, subsidies also induce more search. This creates a second effect that puts pressure on firms to reduce prices. We show that the second effect can dominate, thus causing an overall reduction in average price. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd 2003.
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Bibliographic InfoArticle provided by Verein für Socialpolitik in its journal German Economic Review.
Volume (Year): 4 (2003)
Issue (Month): (November)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1465-6485
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"Equilibrium Comparison Shopping,"
Review of Economic Studies,
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