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Strategic Complementarities and Search Market Equilibrium

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  • Michael T. Rauh

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

Abstract

In this paper, we apply supermodular game theory to the equilibrium search literature with sequential search. We identify necessary and sufficient conditions for strategic complementarities and prove existence of search market equilibrium. When firms are identical, the Diamond Paradox obtains and is robust within the class of search cost densities that are small near zero and support strategic complementarities. Price dispersion is therefore inherently incompatible with strategic complementarities. Finally, we show that a major criticism of the literature, that agents act as if they know the distribution of prices, can be justified in the sense of convergent best response dynamics.

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File URL: http://www.bus.indiana.edu/riharbau/RePEc/iuk/wpaper/bepp2006-01-rauh.pdf
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Bibliographic Info

Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2006-01.

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Date of creation: 2006
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Handle: RePEc:iuk:wpaper:2006-01

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Keywords: Diamond Paradox; price dispersion; search; strategic complementarities;

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  1. 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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  3. Matthijs R. Wildenbeest, 2011. "An empirical model of search with vertically differentiated products," RAND Journal of Economics, RAND Corporation, vol. 42(4), pages 729-757, December.
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  6. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
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  13. Janssen, Maarten C.W. & Moraga-Gonzalez, Jose Luis & Wildenbeest, Matthijs R., 2005. "Truly costly sequential search and oligopolistic pricing," International Journal of Industrial Organization, Elsevier, vol. 23(5-6), pages 451-466, June.
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  28. Michael T Rauh, 1997. "A Model of Temporary Search Market Equilibrium," Economics Working Paper Archive 392, The Johns Hopkins University,Department of Economics.
  29. Michael Rothschild, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown: A Summary," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 1, pages 293-294 National Bureau of Economic Research, Inc.
  30. Khan, M. Ali & Sun, Yeneng, 1999. "Non-cooperative games on hyperfinite Loeb spaces1," Journal of Mathematical Economics, Elsevier, vol. 31(4), pages 455-492, May.
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Cited by:
  1. Maris Goldmanis & Ali Hortaçsu & Chad Syverson & �nsel Emre, 2010. "E-Commerce and the Market Structure of Retail Industries," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 120(545), pages 651-682, 06.

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