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Price Dispersion and Consumer Reservation Prices


  • Anderson, Simon P
  • de Palma, André


We describe firm pricing when consumers follow simple reservation price rules. In stark contrast to other models in the literature, this approach yields price dispersion in pure strategies even when firms have the same marginal costs. At the equilibrium, lower price firms earn higher profits. The range of price dispersion increases with the number of firms: the highest price is the monopoly one, while the lowest price tends to marginal cost. The average transaction price remains substantially above marginal cost even with many firms. The equilibrium pricing pattern is the same when prices are chosen sequentially.

Suggested Citation

  • Anderson, Simon P & de Palma, André, 2004. "Price Dispersion and Consumer Reservation Prices," CEPR Discussion Papers 4618, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4618

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    References listed on IDEAS

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    Cited by:

    1. Jacint Balaguer Coll & José C. Pernías, 2010. "Spatial density, average prices and price dispersion. Evidence from the Spanish hotel industry," Working Papers. Serie EC 2010-03, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    2. Braido, Luis H.B., 2009. "Multiproduct price competition with heterogeneous consumers and nonconvex costs," Journal of Mathematical Economics, Elsevier, vol. 45(9-10), pages 526-534, September.
    3. Alfredo Martin-Oliver & Vicente Salas-Fumas & Jesús Saurina, 2008. "Search Cost and Price Dispersion in Vertically Related Markets: The Case of Bank Loans and Deposits," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 33(4), pages 297-323, December.
    4. repec:eee:touman:v:36:y:2013:i:c:p:391-400 is not listed on IDEAS
    5. Bogumił Kamiński & Maciej Łatek, 2016. "On asymmetric Bertrand duopoly with price uncertainty," International Journal of Economic Theory, The International Society for Economic Theory, vol. 12(4), pages 303-316, December.
    6. Anania, Giovanni & Nistico, Rosanna, 2012. "Price dispersion, search costs and consumers and sellers heterogeneity in retail food markets," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 125594, International Association of Agricultural Economists.
    7. Meghan R. Busse & Ayelet Israeli & Florian Zettelmeyer, 2013. "Repairing the Damage: The Effect of Price Expectations on Auto-Repair Price Quotes," NBER Working Papers 19154, National Bureau of Economic Research, Inc.
    8. Anania, Giovanni & Nisticò, Rosanna, 2014. "Price dispersion and seller heterogeneity in retail food markets," Food Policy, Elsevier, vol. 44(C), pages 190-201.
    9. Giovanni Anania & Rosanna Nisticò, 2011. "Price Dispersion, Search Costs And Consumers And Sellers Heterogeneity In Retail Food Markets," Working Papers 201105, Università della Calabria, Dipartimento di Economia, Statistica e Finanza "Giovanni Anania" - DESF.
    10. Kaminski, Bogumil & Latek, Maciej, 2012. "A Simple Model of Bertrand Duopoly with Noisy Prices," MPRA Paper 41333, University Library of Munich, Germany.

    More about this item


    passive search; price dispersion; reservation price rule;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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