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The dynamic instability of dispersed price equilibria

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  • Ratul, Lahkar
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    Abstract

    We adopt an evolutionary framework to explain price dispersion as a time varying phenomenon. By developing a finite strategy analogue of the Burdett and Judd (1983) price dispersion model, we show that all dispersed price equilibria are unstable under the class of perturbed best response dynamics. Instead, numerical simulations using the logit dynamic show that price dispersion manifests itself as a limit cycle. We verify that limit cycles persist even when the finite strategy model approaches the original continuous strategy model. For a particularly simple case of the model, we prove the existence of a limit cycle.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Theory.

    Volume (Year): 146 (2011)
    Issue (Month): 5 (September)
    Pages: 1796-1827

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    Handle: RePEc:eee:jetheo:v:146:y:2011:i:5:p:1796-1827

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    Web page: http://www.elsevier.com/locate/inca/622869

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    Keywords: Price dispersion Evolutionary game theory Logit dynamic;

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