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Asymmetric price effects of competition

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Author Info

  • Lach, Saul

    ()
    (The Hebrew University)

  • Moraga, Jose L.

    (University of Groningen)

Abstract

This paper examines how the distribution of prices changes with the number of competitors in the market. Using gasoline price data from the Netherlands we find that as competition increases, the distribution of prices spreads out: the low prices go down while the high prices go up, on average. As a result, competition has an asymmetric effect on prices. These findings, which are consistent with a theoretical model where consumers differ in the information they have about prices, imply that consumers' gains from competition depend on their shopping behavior. In our data, all consumers, irrespective of the number of prices they observe, benefit from an increase in the number of gas stations. The magnitude of the welfare gain, however, is greater for those consumers that are aware of more prices. We conclude that an increase in the number of gas stations has a positive but unequal effect on the welfare of consumers in the Netherlands.

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Bibliographic Info

Paper provided by IESE Business School in its series IESE Research Papers with number D/797.

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Length: 66 pages
Date of creation: 15 Jun 2009
Date of revision:
Handle: RePEc:ebg:iesewp:d-0797

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Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/
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Keywords: Asymmetric; Price; Effects; Competition;

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References

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Citations

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Cited by:
  1. Nermuth, Manfred & Pasini, Giacomo & Pin, Paolo & Weidenholzer, Simon, 2013. "The informational divide," Games and Economic Behavior, Elsevier, vol. 78(C), pages 21-30.
  2. Maarten Janssen & Paul Pichler & Simon Weidenholzer, 2009. "Sequential Search with Incompletely Informed Consumers: Theory and Evidence from Retail Gasoline Markets," Vienna Economics Papers 0914, University of Vienna, Department of Economics.
  3. Kaiser, Ulrich & Mendez, Susan J. & Rønde, Thomas, 2010. "Regulation of pharmaceutical prices: Evidence from a reference price reform in Denmark," ZEW Discussion Papers 10-062, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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