Sequential Search with Incompletely Informed Consumers: Theory and Evidence from Retail Gasoline Markets
AbstractA large variety of markets, such as retail markets for gasoline or mortgage markets, are characterized by a small number of firms offering a fairly homogenous product at virtually the same cost, while consumers, being uninformed about this cost, sequentially search for low prices. The present paper provides a theoretical examination of this type of market, and confronts the theory with data on retail gasoline prices. We develop a sequential search model with incomplete information and characterize a perfect Bayesian equilibrium in which consumers follow simple reservation price strategies. Firms strategically exploit consumers being uninformed about their production cost, and set on average higher prices compared to the standard complete information model. Thus, consumer welfare is lower. Using data on the gasoline retail market in Vienna (Austria), we further argue that incomplete information is a necessary feature to explain observed gasoline prices within a sequential search framework.
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Bibliographic InfoPaper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0914.
Date of creation: Sep 2009
Date of revision:
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Web page: http://www.univie.ac.at/vwl
Find related papers by JEL classification:
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-05 (All new papers)
- NEP-COM-2009-12-05 (Industrial Competition)
- NEP-CTA-2009-12-05 (Contract Theory & Applications)
- NEP-MKT-2009-12-05 (Marketing)
- NEP-URE-2009-12-05 (Urban & Real Estate Economics)
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