IDEAS home Printed from https://ideas.repec.org/a/eee/mateco/v81y2019icp1-13.html
   My bibliography  Save this article

(Quasi) uniqueness and restoring dynamics of price-dispersion market equilibria under search cost

Author

Listed:
  • Álvarez, Francisco
  • Rey, José-Manuel

Abstract

We study existence, uniqueness and restoring dynamics of price-dispersion equilibria in a market for a homogeneous good. We assume that costs are heterogeneous across participating firms. Specifically, we rely on classical extreme value theory and some recent developments on fee-setting mechanisms to consider cost distributions that are Generalized Pareto. Our analysis provides results on the existence and uniqueness of a price-dispersion equilibrium that link the cost dispersion across firms with the search cost of consumers. If the former is large enough compared to the latter, existence and a form of uniqueness of price-dispersion equilibrium arise. In addition, we propose a natural best-response market dynamics that delivers convergence to the price-dispersion equilibrium, even if the market departs slightly from the Diamond paradox equilibrium.

Suggested Citation

  • Álvarez, Francisco & Rey, José-Manuel, 2019. "(Quasi) uniqueness and restoring dynamics of price-dispersion market equilibria under search cost," Journal of Mathematical Economics, Elsevier, vol. 81(C), pages 1-13.
    • Handle: RePEc:eee:mateco:v:81:y:2019:i:c:p:1-13
    DOI: 10.1016/j.jmateco.2018.12.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304406818301368
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jmateco.2018.12.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-1090, October.
    2. Ed Hopkins & Robert M. Seymour, 2002. "The Stability of Price Dispersion under Seller and Consumer Learning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1157-1190, November.
    3. Simon Loertscher & Andras Niedermayer, 2007. "When is Seller Price Setting with Linear Fees Optimal for Intermediaries?," Diskussionsschriften dp0706, Universitaet Bern, Departement Volkswirtschaft.
    4. Reinganum, Jennifer F, 1979. "A Simple Model of Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 851-858, August.
    5. Roland Bénabou & Robert Gertner, 1993. "Search with Learning from Prices: Does Increased Inflationary Uncertainty Lead to Higher Markups?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(1), pages 69-93.
    6. Daniel Mochon, 2013. "Single-Option Aversion," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 40(3), pages 555-566.
    7. Rafael Rob, 1985. "Equilibrium Price Distributions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(3), pages 487-504.
    8. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-493, June.
    9. Janssen, Maarten C.W. & Parakhonyak, Alexei & Parakhonyak, Anastasia, 2017. "Non-reservation price equilibria and consumer search," Journal of Economic Theory, Elsevier, vol. 172(C), pages 120-162.
    10. Elisabeth Honka & Pradeep Chintagunta, 2017. "Simultaneous or Sequential? Search Strategies in the U.S. Auto Insurance Industry," Marketing Science, INFORMS, vol. 36(1), pages 21-42, January.
    11. Babur De Los Santos & Ali Hortacsu & Matthijs R. Wildenbeest, 2012. "Testing Models of Consumer Search Using Data on Web Browsing and Purchasing Behavior," American Economic Review, American Economic Association, vol. 102(6), pages 2955-2980, October.
    12. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
    13. Stigler, George J., 2011. "Economics of Information," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 35-49.
    14. Simon Loertscher & Andras Niedermayer, 2012. "Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation," Department of Economics - Working Papers Series 1162, The University of Melbourne.
    15. Greg Kaplan & Guido Menzio, 2015. "The Morphology Of Price Dispersion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 1165-1206, November.
    16. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles," Econometrica, Econometric Society, vol. 56(3), pages 571-599, May.
    17. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    18. Ratul, Lahkar, 2011. "The dynamic instability of dispersed price equilibria," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1796-1827, September.
    19. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    20. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    21. Simon Loertscher & Andras Niedermayer, 2007. "When is Seller Price Setting with Linear Fees Optimal for Intermediaries?," Department of Economics - Working Papers Series 1014, The University of Melbourne.
    22. MacMinn, Richard D, 1980. "Search and Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 308-327, April.
    23. Johnson, Eric J. & Camerer, Colin & Sen, Sankar & Rymon, Talia, 2002. "Detecting Failures of Backward Induction: Monitoring Information Search in Sequential Bargaining," Journal of Economic Theory, Elsevier, vol. 104(1), pages 16-47, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rauh, Michael T., 2009. "Strategic complementarities and search market equilibrium," Games and Economic Behavior, Elsevier, vol. 66(2), pages 959-978, July.
    2. Backus, Matthew R. & Podwol, Joseph Uri & Schneider, Henry S., 2014. "Search costs and equilibrium price dispersion in auction markets," European Economic Review, Elsevier, vol. 71(C), pages 173-192.
    3. José Tudón, 2021. "Can price dispersion be supported solely by information frictions?," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 9(1), pages 75-90, April.
    4. Fishman, Arthur & Simhon, Avi, 2003. "Can Income Equality Increase Competitiveness?," Discussion Papers 14983, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
    5. De los Santos, Babur, 2018. "Consumer search on the Internet," International Journal of Industrial Organization, Elsevier, vol. 58(C), pages 66-105.
    6. Bruce I. Carlin & Florian Ederer, 2019. "Search Fatigue," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 54(3), pages 485-508, May.
    7. Xing Zhang & Tat Y. Chan & Ying Xie, 2018. "Price Search and Periodic Price Discounts," Management Science, INFORMS, vol. 64(2), pages 495-510, February.
    8. Atayev, Atabek, 2022. "Uncertain product availability in search markets," Journal of Economic Theory, Elsevier, vol. 204(C).
    9. Sneha Bakshi, 2020. "Limits of price competition: cost asymmetry and imperfect information," International Journal of Game Theory, Springer;Game Theory Society, vol. 49(4), pages 913-932, December.
    10. Simon P. Anderson & Régis Renault & Claude Jessua, 1996. "Produits différenciés et information imparfaite des consommateurs," Revue Économique, Programme National Persée, vol. 47(3), pages 425-435.
    11. Xulia González & Daniel Miles-Touya, 2018. "Price dispersion, chain heterogeneity, and search in online grocery markets," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 9(1), pages 115-139, March.
    12. Donna, Javier D. & Schenone, Pablo & Veramendi, Gregory F., 2020. "Networks, frictions, and price dispersion," Games and Economic Behavior, Elsevier, vol. 124(C), pages 406-431.
    13. Bruno Cesar Aurichio Ledo, 2011. "Competição Em Preços Entre Corretores Deseguros De Automóveis," Anais do XXXVIII Encontro Nacional de Economia [Proceedings of the 38th Brazilian Economics Meeting] 045, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    14. Stahl, Dale O., 1996. "Oligopolistic pricing with heterogeneous consumer search," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 243-268.
    15. McCarthy, Ian M., 2016. "Advertising intensity and welfare in an equilibrium search model," Economics Letters, Elsevier, vol. 141(C), pages 20-26.
    16. ANDERSON, Simon & de PALMA, André, 2003. "Price dispersion," LIDAM Discussion Papers CORE 2003032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    17. Ralph-C Bayer & Changxia Ke, 2010. "Rockets and Feathers in the Laboratory," School of Economics and Public Policy Working Papers 2010-20, University of Adelaide, School of Economics and Public Policy.
    18. Cason, Timothy N. & Friedman, Daniel, 2003. "Buyer search and price dispersion: a laboratory study," Journal of Economic Theory, Elsevier, vol. 112(2), pages 232-260, October.
    19. Anania, Giovanni & Nisticò, Rosanna, 2014. "Price dispersion and seller heterogeneity in retail food markets," Food Policy, Elsevier, vol. 44(C), pages 190-201.
    20. Fishman, Arthur, 1992. "Search Technology, Staggered Price-Setting, and Price Dispersion," American Economic Review, American Economic Association, vol. 82(1), pages 287-298, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:mateco:v:81:y:2019:i:c:p:1-13. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jmateco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.