Price Dispersion with Directed Search
AbstractWe study a market where identical capacity-constrained sellers compete to attract identical buyers, via price advertisements. Once buyers reach a store, prices might be renegotiable in a manner that is responsive to excess demand. We focus strongly symmetric equilibria, proving their existence and providing explicit solutions for the distributions of advertised and sale prices as functions of market characteristics. Since variations in the posted price can affect the store’s attractiveness and the incidence of haggling, the model endogenizes the ‘pricing convention’ prevailing in the market and generates several empirically testable predictions on market behavior.
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Bibliographic InfoPaper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1173.
Length: 42 pages
Date of creation: Dec 2004
Date of revision:
Directed Search ; Endogenous Trading Mechanisms ; Market Frictions ; Price Dispersion;
Other versions of this item:
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- D39 - Microeconomics - - Distribution - - - Other
- D49 - Microeconomics - - Market Structure and Pricing - - - Other
- E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-06-17 (All new papers)
- NEP-COM-2006-06-17 (Industrial Competition)
- NEP-MAC-2006-06-17 (Macroeconomics)
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