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Instability of endogenous price dispersion equilibria: A simulation

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  • Lucas Herrenbrueck

Abstract

Models of price posting by firms and search by consumers (such as Burdett and Judd 1983), often feature equilibria with endogenous price dispersion. However, such equilibria are strategically fragile. In order to investigate how robust they are in the absence of an external coordination mechanism, I simulate various protocols firms may use to update their prices. Despite firms being myopic, some protocols yield results close to the benchmark model. If firms rush to update before observing competitors actions, profits are higher on average but volatile and cyclical. With cost dispersion, prices become more stable as they are more closely tied to costs. All results are robust to moderate menu costs.

Suggested Citation

  • Lucas Herrenbrueck, 2018. "Instability of endogenous price dispersion equilibria: A simulation," Canadian Journal of Economics, Canadian Economics Association, vol. 51(4), pages 1363-1385, November.
    • Handle: RePEc:cje:issued:v:51:y:2018:i:4:p:1363-1385
    DOI: 10.1111/caje.12355
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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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