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Buyer Subsidies in an Equilibrium Model of Price Dispersion

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  • Henrik Orzen
  • Martin Sefton

Abstract

. We present a model of equilibrium price dispersion in which a per‐unit subsidy to buyers can reduce average prices. The reason is that subsidies have two effects on average prices that work in opposite directions. First, subsidies raise buyers' willingness‐to‐pay, and by itself this causes firms to charge higher prices. However, since a higher willingness‐to‐pay lowers the relative cost of search, subsidies also induce more search. This creates a second effect that puts pressure on firms to reduce prices. We show that the second effect can dominate, thus causing an overall reduction in average price.

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  • Henrik Orzen & Martin Sefton, 2003. "Buyer Subsidies in an Equilibrium Model of Price Dispersion," German Economic Review, Verein für Socialpolitik, vol. 4(4), pages 497-501, November.
    • Handle: RePEc:bla:germec:v:4:y:2003:i:4:p:497-501
    DOI: 10.1111/j.1465-6485.2003.00091.x
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    References listed on IDEAS

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    1. Wilde, Louis L, 1992. "Comparison Shopping as a Simultaneous Move Game," Economic Journal, Royal Economic Society, vol. 102(412), pages 562-569, May.
    2. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 465-491.
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