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Price Dispersion: an Evolutionary Approach

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Author Info
Ed Hopkins
Robert M. Seymour

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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 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 ESRC Centre on Economics Learning and Social Evolution in its series ELSE working papers with number 043.

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Handle: RePEc:els:esrcls:043

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Related research
Keywords: Learning; Evolution; Search; Price Dispersion.;

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug.. [Downloadable!] (restricted)
  2. Wilde, Louis L & Schwartz, Alan, 1979. "Equilibrium Comparison Shopping," Review of Economic Studies, Blackwell Publishing, vol. 46(3), pages 543-53, July. [Downloadable!] (restricted)
    Other versions:
  3. Ed Hopkins, 1995. "Learning, Matching and Aggregation," Game Theory and Information 9512001, EconWPA. [Downloadable!]
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  4. Rothschild, Michael, 1973. "Models of Market Organization with Imperfect Information: A Survey," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1283-1308, Nov.-Dec.. [Downloadable!] (restricted)
  5. Fershtman, Chaim & Fishman, Arthur, 1992. "Price Cycles and Booms: Dynamic Search Equilibrium," American Economic Review, American Economic Association, vol. 82(5), pages 1221-33, December. [Downloadable!] (restricted)
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  6. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September. [Downloadable!] (restricted)
  7. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-93, June. [Downloadable!] (restricted)
  8. Fudenberg Drew & Kreps David M., 1993. "Learning Mixed Equilibria," Games and Economic Behavior, Elsevier, vol. 5(3), pages 320-367, July. [Downloadable!] (restricted)
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  9. Bester, Helmut, 1988. "Bargaining, Search Costs and Equilibrium Price Distributions," Review of Economic Studies, Blackwell Publishing, vol. 55(2), pages 201-14, April. [Downloadable!] (restricted)
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  10. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June. [Downloadable!] (restricted)
  11. Benabou Roland, 1993. "Search Market Equilibrium, Bilateral Heterogeneity, and Repeat Purchases," Journal of Economic Theory, Elsevier, vol. 60(1), pages 140-158, June. [Downloadable!] (restricted)
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  12. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July. [Downloadable!] (restricted)
  13. Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, vol. 61(1), pages 29-56, January. [Downloadable!] (restricted)
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  14. Salop, Steven & Stiglitz, Joseph E, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 493-510, October. [Downloadable!] (restricted)
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  15. Gastwirth, Joseph L, 1976. "On Probabilistic Models of Consumer Search for Information," The Quarterly Journal of Economics, MIT Press, vol. 90(1), pages 38-50, February. [Downloadable!] (restricted)
  16. Harrison, Glenn W & Morgan, Peter, 1990. "Search Intensity in Experiments," Economic Journal, Royal Economic Society, vol. 100(401), pages 478-86, June. [Downloadable!] (restricted)
  17. Wilde, Louis L, 1992. "Comparison Shopping as a Simultaneous Move Game," Economic Journal, Royal Economic Society, vol. 102(412), pages 562-69, May. [Downloadable!] (restricted)
  18. Nachbar, J H, 1990. ""Evolutionary" Selection Dynamics in Games: Convergence and Limit Properties," International Journal of Game Theory, Springer, vol. 19(1), pages 59-89.
  19. Morgan, Peter & Manning, Richard, 1985. "Optimal Search," Econometrica, Econometric Society, vol. 53(4), pages 923-44, July. [Downloadable!] (restricted)
  20. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Joerg Oechssler & Frank Riedel, 1998. "Evolutionary Dynamics on Infinite Strategy Spaces," Game Theory and Information 9805002, EconWPA, revised 12 May 1998. [Downloadable!]
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