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Buyer search and price dispersion: a laboratory study

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  • Cason, Timothy N.
  • Friedman, Daniel

Abstract

Posted offer markets with costly buyer search are investigated in 18 laboratory sessions. Each period sellers simultaneously post prices. Then each buyer costlessly observes one or (with probability 1-q) two of the posted prices, and either accepts an observed price, drops out, or pays a cost to search again that period. The sessions vary q, the search cost, and the number and kind of buyers. Equilibrium theory predicts a unified very low (very high) price for q=0 (q=1) and predicts specific distributions of dispersed prices for q=1/3 and 2/3. Actual transaction prices conform rather closely to the predictions, especially in treatments with many robot buyers. Individual buyer and seller behavior, however, differs systematically from the equilibrium predictions: buyers' reservation prices are biased away from the extremes and sellers' posted prices have positive autocorrelation and cross sectional correlation. Learning models can account for a portion of these deviations from equilibrium behavior.
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  • Cason, Timothy N. & Friedman, Daniel, 2003. "Buyer search and price dispersion: a laboratory study," Journal of Economic Theory, Elsevier, vol. 112(2), pages 232-260, October.
  • Handle: RePEc:eee:jetheo:v:112:y:2003:i:2:p:232-260
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