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Price Dispersion: An Evolutionary Approach

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  • Ed Hopkins

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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 demonstrating 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 (Econometrica, 1983), this paper, extending evolutionary techniques to a game with non-linear payoffs and a continuum of strategies, re-examines 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 ESE Discussion Papers with number 1.

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Handle: RePEc:edn:esedps:1

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  1. Benabou Roland, 1993. "Search Market Equilibrium, Bilateral Heterogeneity, and Repeat Purchases," Journal of Economic Theory, Elsevier, Elsevier, vol. 60(1), pages 140-158, June.
  2. Fudenberg, D. & Kreps, D.M., 1992. "Learning Mixed Equilibria," Working papers 92-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Ed Hopkins, . "Learning, Matching and Aggregation," ELSE working papers 033, ESRC Centre on Economics Learning and Social Evolution.
  4. Steven Salop & Joseph Stiglitz, 1977. "Bargains and ripoffs: a model of monopolistically competitive price dispersion," Special Studies Papers 94, Board of Governors of the Federal Reserve System (U.S.).
  5. Kandori, M. & Mailath, G.J., 1991. "Learning, Mutation, And Long Run Equilibria In Games," Papers, Princeton, Woodrow Wilson School - John M. Olin Program 71, Princeton, Woodrow Wilson School - John M. Olin Program.
  6. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, Elsevier, vol. 3(2), pages 156-168, June.
  7. 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.
  8. Morgan, Peter & Manning, Richard, 1985. "Optimal Search," Econometrica, Econometric Society, Econometric Society, vol. 53(4), pages 923-44, July.
  9. Fershtman, C. & Fishman, A., 1989. "Price Cycles and Booms : Dynamic Search Equilibrium," Discussion Paper, Tilburg University, Center for Economic Research 1989-22, Tilburg University, Center for Economic Research.
  10. 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.
  11. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 69, pages 213.
  12. 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.
  13. 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.
  14. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
  15. 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.
  16. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, American Economic Association, vol. 70(4), pages 651-59, September.
  17. 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.
  18. 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.
  19. 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..
  20. 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..
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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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