Price setting and competition with search frictions
AbstractThis paper investigates price determination in a decentralized economy in which buyers' valuations are stochastic and unobservable. In such a market, each buyer's reservation utility depends both on the prevailing price and on the price he actually encounters. The buyer's willingness to trade is shown to be decreasing in the price, and this creates the trade-off for the sellers' price setting. Even though the sellers have incentives to manipulate the buyer's willingness to trade, the economy is not fully competitive; it does not converge to the Walrasian outcome as search frictions disappear. The model is used to study various market structures to explore the nature of market power in search equilibrium. It is shown that price dispersion arises as a result of search frictions and oligopolistic price setting.
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Bibliographic InfoPaper provided by Graduate School of Economics and Business Administration, Hokkaido University in its series Discussion paper series. A with number 203.
Length: 29 pages
Date of creation: Feb 2009
Date of revision:
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random search; price setting; competition; oligopoly; C78; D40;
Find related papers by JEL classification:
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- D40 - Microeconomics - - Market Structure and Pricing - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-14 (All new papers)
- NEP-COM-2009-02-14 (Industrial Competition)
- NEP-DGE-2009-02-14 (Dynamic General Equilibrium)
- NEP-IND-2009-02-14 (Industrial Organization)
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