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Costly Search, Capacity Constraints, and Bertrand Equilibrium Price Dispersion

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  • Arnold, Michael A

Abstract

This article analyzes the impact of transaction (search) costs and capacity constraints in an almost competitive market with homogeneous firms that compete on price. We characterize conditions under which Nash equilibria with price dispersion exist; in equilibrium, firms play pure strategies in prices and consumers adopt a symmetric mixed search strategy. Price dispersion is possible even though consumers all have the same search cost and valuation for the item and prices charged by all firms are common knowledge. Copyright 2000 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Arnold, Michael A, 2000. "Costly Search, Capacity Constraints, and Bertrand Equilibrium Price Dispersion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 117-131, February.
  • Handle: RePEc:ier:iecrev:v:41:y:2000:i:1:p:117-31
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    Cited by:

    1. Kevin x.d. Huang & Zhe Li & Jianfei Sun, 2018. "Bank Competition, Directed Search, and Loan Sales," Vanderbilt University Department of Economics Working Papers 18-00001, Vanderbilt University Department of Economics.
    2. Clay, Karen & Krishnan, Ramayya & Wolff, Eric, 2001. "Prices and Price Dispersion on the Web: Evidence from the Online Book Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 49(4), pages 521-539, December.
    3. Michael Sattinger, 2003. "Price Dispersion and Short Run Equilibrium in a Queuing Model," Discussion Papers 03-09, University at Albany, SUNY, Department of Economics.
    4. Ireland, Norman J., 2003. "Random pricing by labor-managed firms in markets with imperfect consumer information," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 573-583, September.
    5. Polachek, Solomon & Xiang, Jun, 2005. "The Effects of Incomplete Employee Wage Information: A Cross-Country Analysis," IZA Discussion Papers 1735, Institute for the Study of Labor (IZA).
    6. Beard, Rodney, 2008. "A dynamic model of renewable resource harvesting with Bertrand competition," MPRA Paper 8916, University Library of Munich, Germany.
    7. Michael Sattinger, 2002. "A Queuing Model of the Market for Access to Trading Partners," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 533-548, May.
    8. Sun, Ching-jen, 2005. "Dynamic Price Dispersion in a Bertrand-Edgeworth Model," MPRA Paper 9854, University Library of Munich, Germany, revised Dec 2007.
    9. Arnold, Michael A. & Saliba, Christine, 2011. "Asymmetric capacity constraints and equilibrium price dispersion," Economics Letters, Elsevier, vol. 111(2), pages 158-160, May.
    10. Kathy Baylis & Jeffrey Perloff, 2002. "Price Dispersion on the Internet: Good Firms and Bad Firms," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 21(3), pages 305-324, November.
    11. Ireland, Norman J, 2002. "Firms' Strategies For Reducing The Effectiveness Of Consumer Price Search," The Warwick Economics Research Paper Series (TWERPS) 627, University of Warwick, Department of Economics.
    12. Michael Sattinger, 2003. "Brokers and the Equilibrium Price Function," Discussion Papers 03-11, University at Albany, SUNY, Department of Economics.
    13. Joaquín Alegre & Maria Sard, 2006. "Tour operators' price strategie in the Balearic Islands," DEA Working Papers 19, Universitat de les Illes Balears, Departament d'Economía Aplicada.
    14. Li, Zhe & Sun, Jianfei, 2011. "Bank competition, securitization and risky investment," MPRA Paper 34173, University Library of Munich, Germany.
    15. Michael A. Arnold & Christine Saliba, 2003. "Price Dispersion in Online Markets: The Case of College Textbooks," Working Papers 03-02, University of Delaware, Department of Economics.

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