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On the Welfare Gains of Price Dispersion

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  • RICHARD DUTU
  • BENOIT JULIEN
  • IAN KING

Abstract

Can price dispersion be associated with higher levels of welfare? To answer we compare two economies that differ only in the way prices are formed. In the first, sellers post a unique price–quantity pair, with no price dispersion. In the second, sellers post a quantity only and let prices be determined ex post by realized demand, resulting in price dispersion. We show that while agents trade lower quantities when prices are dispersed (an intensive margin effect), they also trade more often (an extensive margin effect). At low inflation, the extensive margin dominates making agents better off with price dispersion.
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  • Richard Dutu & Benoit Julien & Ian King, 2012. "On the Welfare Gains of Price Dispersion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 757-786, August.
    • Handle: RePEc:mcb:jmoncb:v:44:y:2012:i:5:p:757-786
    DOI: j.1538-4616.2012.00510.x
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    Cited by:

    1. Wang, Liang, 2016. "Endogenous search, price dispersion, and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 94-117.
    2. Gu, Chao & Wright, Randall, 2016. "Monetary mechanisms," Journal of Economic Theory, Elsevier, vol. 163(C), pages 644-657.
    3. Liang Wang, 2011. "Inflation and Welfare with Search and Price Dispersion," Working Papers 201113, University of Hawaii at Manoa, Department of Economics.

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