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Price Dispersion

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  • Simon P. Anderson

    ()

  • André de Palma

    ()

Abstract

We describe firm pricing when consumers search passively and follow simple reservation price rules. In stark contrast to other models in the literature, this approach yields equilib- rium price dispersion in pure strategies even when firms have the same marginal costs. In equilibrium, lower price firms earn higher profits. The range of price dispersion increases with the number of firms: the highest price is the monopoly one, while the lowest price tends to marginal cost. The average transaction price remains substantially above marginal cost even with many firms. Introducing shoppers who buy from the cheapest firm may increase market prices.

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Bibliographic Info

Paper provided by University of Virginia, Department of Economics in its series Virginia Economics Online Papers with number 361.

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Length: 39 pages
Date of creation: Dec 2003
Date of revision:
Handle: RePEc:vir:virpap:361

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Web page: http://www.virginia.edu/economics/home.html

Related research

Keywords: Price dispersion; reservation price rule; passive search.;

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References

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Cited by:
  1. Alfredo Martin-Oliver & Vicente Salas-Fumas & Jesús Saurina, 2008. "Search Cost and Price Dispersion in Vertically Related Markets: The Case of Bank Loans and Deposits," Review of Industrial Organization, Springer, vol. 33(4), pages 297-323, December.
  2. Il-Horn Hann & Kai-Lung Hui & Sang-Yong Tom Lee & Ivan P.L. Png, 2005. "Sales and Promotions: A More General Model," Industrial Organization 0508014, EconWPA.

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