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Price Dispersion: An Evolutionary Approach

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  • Ed Hopkins

    ()
    (The University of Edinburgh)

Abstract

In many markets it is possible to find rival sellers charging different prices for the same good. Earlier research has explained this phenomenon by demon-strating the existence of dispersed price equilibria when consumers must make use of costly search to discover prices. Taking as a starting point the model of Burdett and Judd (Econometric, 1983), this paper, extending evolutionary techniques to a game with nonlinear payoffs and a continuum of strategies, reexamines the question of price dispersion from an evolutionary, disequilibrium perspective. That is, firms and consumers adjust behaviour adaptively in response to current market conditions. We find that dispersed price equilibria are unstable when consumers use a fixed sample size search rule but may be stable when a reservation price rule is used.

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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series Department of Economics with number 1996 : III.

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Handle: RePEc:edn:edecdp:9603

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  1. Gastwirth, Joseph L, 1976. "On Probabilistic Models of Consumer Search for Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(1), pages 38-50, February.
  2. Benabou, Roland, 1988. "Search market equilibrium bilateral heterogeneity and repeat purchases," CEPREMAP Working Papers (Couverture Orange) 8806, CEPREMAP.
  3. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 480-93, June.
  4. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  5. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 69, pages 213.
  6. Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, Econometric Society, vol. 61(1), pages 29-56, January.
  7. Morgan, Peter & Manning, Richard, 1985. "Optimal Search," Econometrica, Econometric Society, Econometric Society, vol. 53(4), pages 923-44, July.
  8. Ed Hopkins, . "Learning, Matching and Aggregation," ESE Discussion Papers 2, Edinburgh School of Economics, University of Edinburgh.
  9. Salop, Steven & Stiglitz, Joseph E, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 493-510, October.
  10. Fershtman, C. & Fishman, A., 1989. "Price Cycles And Booms Dynamic Search Equilibrium," Papers, Tilburg - Center for Economic Research 8922, Tilburg - Center for Economic Research.
  11. Nachbar, J H, 1990. ""Evolutionary" Selection Dynamics in Games: Convergence and Limit Properties," International Journal of Game Theory, Springer, Springer, vol. 19(1), pages 59-89.
  12. Harrison, Glenn W & Morgan, Peter, 1990. "Search Intensity in Experiments," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 100(401), pages 478-86, June.
  13. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
  14. Drew Fudenberg & David Kreps, 2010. "Learning Mixed Equilibria," Levine's Working Paper Archive 415, David K. Levine.
  15. Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug..
  16. Rothschild, Michael, 1973. "Models of Market Organization with Imperfect Information: A Survey," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(6), pages 1283-1308, Nov.-Dec..
  17. Bester, Helmut, 1988. "Bargaining, Search Costs and Equilibrium Price Distributions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 55(2), pages 201-14, April.
  18. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  19. 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.
  20. Wilde, Louis L, 1992. "Comparison Shopping as a Simultaneous Move Game," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 102(412), pages 562-69, May.
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Cited by:
  1. Kirman, Alan P. & Vriend, Nicolaas J., 2001. "Evolving market structure: An ACE model of price dispersion and loyalty," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(3-4), pages 459-502, March.

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