Buyer Subsidies in an Equilibrium Model of Price Dispersion
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. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd 2003.
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Volume (Year): 4 (2003)
Issue (Month): (November)
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ekkehard Kessner & Mattias K. Polborn, 2000. "A New Test of Price Dispersion," German Economic Review, Verein für Socialpolitik, vol. 1(2), pages 221-240, 05.
- Dennis C. Mueller & B. Burcin Yurtoglu, 2000. "Country Legal Environments and Corporate Investment Performance," German Economic Review, Verein für Socialpolitik, vol. 1(2), pages 187-220, 05.
- Wilde, Louis L, 1992. "Comparison Shopping as a Simultaneous Move Game," Economic Journal, Royal Economic Society, vol. 102(412), pages 562-69, May.
- Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 465-491.
- Louis L. Wilde & Alan Schwartz, 1979. "Equilibrium Comparison Shopping," Review of Economic Studies, Oxford University Press, vol. 46(3), pages 543-553.
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