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Oligopolistic Price Competition with Informed and Uninformed Buyers

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  • Michal Ostatnicky
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    Abstract

    The standard price competition of two or more players leads to Bertrand equilibrium in basic economic theory (if complete information is assumed, there are no capacity constraints, etc.). In reality, even on highly competitive Internet-based markets, the prices of seemingly undifferentiated goods (e.g. books and CDs on Amazon and similar e-shops) vary, although competition seems prima facie based on prices. I follow the literature that originated with Varian’s (1980) model, especially Kocas and Kiyak (2006), and analyze oligopolistic markets where buyers have reservation values drawn from a common distribution function rather than a single value (inelastic demand), as typically assumed in the models of Varian’s or Kocas and Kiyak’s type. The model presented in this paper is developed from the simplest symmetric set-up (uninformed buyers are assigned to sellers evenly) to the most complex asymmetric set-up with many competing sellers (uninformed buyers are distributed over sellers unevenly). The most complex set-up theoretically rationalizes the empirical findings of Kocas and Kiyak. In the equilibrium of my model, all sellers randomly choose prices from a non-trivial interval for (almost) every seller, while in Kocas and Kiyak’s theoretical model only two sellers randomize while others always offer the same price.

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    Bibliographic Info

    Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp413.

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    Date of creation: Aug 2010
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    Handle: RePEc:cer:papers:wp413

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    Keywords: Oligopoly; price competition; price dispersion;

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    1. Wilde, Louis L. & Schwartz, Alan., . "Equilibrium Comparison Shopping," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 184, California Institute of Technology, Division of the Humanities and Social Sciences.
    2. Eric K. Clemons & Il-Horn Hann & Lorin M. Hitt, 2002. "Price Dispersion and Differentiation in Online Travel: An Empirical Investigation," Management Science, INFORMS, INFORMS, vol. 48(4), pages 534-549, April.
    3. Kocas, Cenk & Kiyak, Tunga, 2006. "Theory and evidence on pricing by asymmetric oligopolies," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 24(1), pages 83-105, January.
    4. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
    5. Michael R. Baye & Casper G. De Vries, 1992. "Mixed Strategy Trade Equilibria," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 25(2), pages 281-93, May.
    6. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 700-712, September.
    7. D. Neven & G. Norman & Jacques-Francois Thisse, 1991. "Attitudes toward Foreign Products and International Price Competition," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 24(1), pages 1-11, February.
    8. Maxim Sinitsyn, 2007. "Characterization Of The Support Of The Mixed Strategy Price Equilibria In Oligopolies With Heterogeneous Consumers," Departmental Working Papers, McGill University, Department of Economics 2007-08, McGill University, Department of Economics.
    9. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 61(4), pages 427-49, October.
    10. Stiglitz, J E, 1979. "Equilibrium in Product Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 69(2), pages 339-45, May.
    11. Reinganum, Jennifer F, 1979. "A Simple Model of Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(4), pages 851-58, August.
    12. Braverman, Avishay, 1980. "Consumer Search and Alternative Market Equilibria," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(3), pages 487-502, April.
    13. repec:wop:humbsf:2000-24 is not listed on IDEAS
    14. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, American Economic Association, vol. 70(4), pages 651-59, September.
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