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Macro shocks cause equilibrium price dispersion

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  • de Meza, David
  • Reito, Francesco

Abstract

Price dispersion is shown to arise when demand is stochastic, ex-ante identical competitive firms set price prior to the realization of uncertainty and ex-ante identical buyers cannot switch sellers if rationed.

Suggested Citation

  • de Meza, David & Reito, Francesco, 2021. "Macro shocks cause equilibrium price dispersion," Economics Letters, Elsevier, vol. 208(C).
    • Handle: RePEc:eee:ecolet:v:208:y:2021:i:c:s0165176521003591
    DOI: 10.1016/j.econlet.2021.110082
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    References listed on IDEAS

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    1. Benjamin Eden, 2018. "Price Dispersion And Demand Uncertainty: Evidence From U.S. Scanner Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(3), pages 1035-1075, August.
    2. Eden, Benjamin, 1990. "Marginal Cost Pricing When Spot Markets Are Complete," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1293-1306, December.
    3. Carlton, Dennis W, 1978. "Market Behavior with Demand Uncertainty and Price Inflexibility," American Economic Review, American Economic Association, vol. 68(4), pages 571-587, September.
    4. de Meza, David & Reito, Francesco, 2020. "Too much waste, not enough rationing: The failure of stochastic, competitive markets," Journal of Economic Theory, Elsevier, vol. 188(C).
    5. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    6. Albrecht, James W & Axell, Bo, 1984. "An Equilibrium Model of Search Unemployment," Journal of Political Economy, University of Chicago Press, vol. 92(5), pages 824-840, October.
    7. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-1579, September.
    8. Prescott, Edward C, 1975. "Efficiency of the Natural Rate," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1229-1236, December.
    9. Raymond Deneckere & James Peck, 1995. "Competition Over Price and Service Rate When Demand is Stochastic: A Strategic Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 148-162, Spring.
    10. Han Hong & Matthew Shum, 2006. "Using price distributions to estimate search costs," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 257-275, June.
    11. James D. Dana Jr., 1999. "Using Yield Management to Shift Demand When the Peak Time is Unknown," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 456-474, Autumn.
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    More about this item

    Keywords

    Stochastic demand; Price dispersion; Rationing; Waste;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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