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Non-reservation price equilibria and consumer search

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  • Janssen, Maarten C.W.
  • Parakhonyak, Alexei
  • Parakhonyak, Anastasia

Abstract

Reservation price equilibria (RPE) do not accurately assess market power in consumer search markets. In most search markets, consumers do not know important elements of the environment in which they search (such as, for example, firms' cost). We argue that when consumers learn when searching, RPE suffer from theoretical issues, such as non-existence and critical dependence on specific out-of-equilibrium beliefs. We characterize equilibria where consumers rationally choose search strategies that are not characterized by a reservation price. Non-RPE always exist and do not depend on specific out-of-equilibrium beliefs. Non-RPE have active consumer search and are consistent with recent empirical findings.

Suggested Citation

  • Janssen, Maarten C.W. & Parakhonyak, Alexei & Parakhonyak, Anastasia, 2017. "Non-reservation price equilibria and consumer search," Journal of Economic Theory, Elsevier, vol. 172(C), pages 120-162.
  • Handle: RePEc:eee:jetheo:v:172:y:2017:i:c:p:120-162
    DOI: 10.1016/j.jet.2017.08.003
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    References listed on IDEAS

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    More about this item

    Keywords

    Sequential search; Non-reservation price equilibria; Asymmetric information; Consumer learning;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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