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Complementarity, Search, and Price Dispersion

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  • Michael Rauh

    (Indiana University)

Abstract

We study an equilibrium sequential search model where buyers have potentially downward-sloping demand and with bilateral heterogeneity in buyers' search costs and firms' production costs. We show that downward- sloping demand and heterogeneity in production costs are necessary to ensure price dispersion when buyers have finite willingness to pay. We then show that firms' profits display increasing differences with respect to price and the distribution of prices when the distribution of search costs is 'uniform-like'. It follows that the set of equilibrium price distributions is nonempty and has a largest and smallest element, in the sense of first-order stochastic dominance. Since the high-price equilibrium is strongly focal, equilibrium is therefore effectively unique

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Bibliographic Info

Paper provided by EconWPA in its series Game Theory and Information with number 0508008.

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Length: 22 pages
Date of creation: 21 Aug 2005
Date of revision:
Handle: RePEc:wpa:wuwpga:0508008

Note: Type of Document - pdf; pages: 22
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Web page: http://128.118.178.162

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Keywords: Complementarity; supermodularity; search; price dispersion.;

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  1. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  2. Fershtman, Chaim & Fishman, Arthur, 1994. "The 'perverse' effects of wage and price controls in search markets," European Economic Review, Elsevier, vol. 38(5), pages 1099-1112, May.
  3. Rauh, Michael T., 2004. "Wage and price controls in the equilibrium sequential search model," European Economic Review, Elsevier, vol. 48(6), pages 1287-1300, December.
  4. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  5. Michael R. Baye & John Morgan, 2004. "Price Dispersion in the Lab and on the Internet: Theory and Evidence," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 448-466, Autumn.
  6. Michael T Rauh, 1997. "A Model of Temporary Search Market Equilibrium," Economics Working Paper Archive 392, The Johns Hopkins University,Department of Economics.
  7. Robert, Jacques & Stahl, Dale O, II, 1993. "Informative Price Advertising in a Sequential Search Model," Econometrica, Econometric Society, vol. 61(3), pages 657-86, May.
  8. Spulber,Daniel F., 2009. "The Theory of the Firm," Cambridge Books, Cambridge University Press, number 9780521517386.
  9. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June.
  10. Jennifer F. Reinganum, 1978. "A Simple Model of Equilibrium Price Dispersion," Discussion Papers 335, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Michael T. Rauh, 2005. "Nonstandard Foundations of Equilibrium Search Models," Working Papers 2005-02, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  12. Benabou, Roland, 1992. "Inflation and Efficiency in Search Markets," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 299-329, April.
  13. Michael T. Rauh, 2003. "Non-cooperative games with a continuum of players whose payoffs depend on summary statistics," Economic Theory, Springer, vol. 21(4), pages 901-906, 06.
  14. 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.
  15. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  16. Daniel F. Spulber, 1996. "Market Microstructure and Intermediation," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 135-152, Summer.
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