IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Heterogeneous Price Information and the Effect of Competition

  • Lach, Saul
  • Moraga-González, José-Luis

This paper examines how the distribution of prices and consumer welfare change with the number of competitors in a model where consumers di¤er in the amount of price information they have. We only assume that an increase in the number of competitors results in an increase in the probability that consumers observe more prices. We then show, first, that the lower percentiles of the price distribution must decrease when the number of competitors goes up, while the higher percentiles of the price distribution need not decrease. We next provide a sufficient condition for all price percentiles to decline. In such a situation, some percentiles fall more than others, which leads to asymmetric consumer welfare gains from increased competition. Third, we provide a sufficient condition under which the higher percentiles of the distribution of prices paid by all types of consumers increase. When this happens, the probability that a consumer already paying a high price will pay even a higher price increases and it may even be the case that some consumers experience a welfare loss on average. Nevertheless, the weighted average price paid by consumers - the consumer surplus - always (weakly) decreases with increased competition. We provide an empirical strategy to identify how the response of prices to increased competition varies along the price distribution and use gasoline price data from the Netherlands to illustrate.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7319.

in new window

Date of creation: Jun 2009
Date of revision:
Handle: RePEc:cpr:ceprdp:7319
Contact details of provider: Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information: Email:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Perloff, Jeffrey M. & Wu, Ximing, 2007. "Tax incidence varies across the price distribution," Economics Letters, Elsevier, vol. 96(1), pages 116-119, July.
  2. repec:cup:cbooks:9780521608275 is not listed on IDEAS
  3. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  4. Baye, Michael R. & Kovenock, Dan & de Vries, Casper G., 1992. "It takes two to tango: Equilibria in a model of sales," Games and Economic Behavior, Elsevier, vol. 4(4), pages 493-510, October.
  5. Fershtman, C. & Fishman, A., 1989. "Price Cycles And Booms: Dynamic Search Equilibrium," Papers 1-89, Tel Aviv.
  6. repec:cup:cbooks:9780521845731 is not listed on IDEAS
  7. Jose Luis Moraga-Gonzalez & Zsolt Sandor & Matthijs R. Wildenbeest, 2010. "Nonsequential Search Equilibrium with Search Cost Heterogeneity," Working Papers 2010-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  8. Maarten C. W. Janssen & José Luis Moraga-Gonz�lez, 2004. "Strategic Pricing, Consumer Search and the Number of Firms," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1089-1118.
  9. Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Consumer Protection and the Incentive to Become Informed," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 399-410, 04-05.
  10. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  11. Ambarish Chandra & Mariano Tappata, 2011. "Consumer search and dynamic price dispersion: an application to gasoline markets," RAND Journal of Economics, RAND Corporation, vol. 42(4), pages 681-704, December.
  12. Morgan, John & Orzen, Henrik & Sefton, Martin, 2006. "An experimental study of price dispersion," Games and Economic Behavior, Elsevier, vol. 54(1), pages 134-158, January.
  13. Mark Armstrong, 2008. "Interactions between Competition and Consumer Policy," CPI Journal, Competition Policy International, vol. 4.
  14. repec:clu:wpaper:0405-20 is not listed on IDEAS
  15. Matthew Lewis, 2008. "PRICE DISPERSION AND COMPETITION WITH DIFFERENTIATED SELLERS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 654-678, 09.
  16. Matthijs R Wildenbeest, 2009. "An Empirical Model of Search with Vertically Differentiated Products," Working Papers 2009-01, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  17. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
  18. Waterson, Michael, 2003. "Consumers and Competition," The Warwick Economics Research Paper Series (TWERPS) 679, University of Warwick, Department of Economics.
  19. Kristopher S. Gerardi & Adam Hale Shapiro, 2009. "Does Competition Reduce Price Dispersion? New Evidence from the Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 1-37, 02.
  20. Maarten C. W. Janssen & José Luis Moraga-González, 2004. "Strategic Pricing, Consumer Search and the Number of Firms," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1089-1118, October.
  21. Ivan A. Canay, 2011. "A simple approach to quantile regression for panel data," Econometrics Journal, Royal Economic Society, vol. 14(3), pages 368-386, October.
  22. Barron, John M. & Taylor, Beck A. & Umbeck, John R., 2004. "Number of sellers, average prices, and price dispersion," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1041-1066, November.
  23. Schwartz, Alan & Wilde, Louis L, 1985. "Product Quality and Imperfect Information," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 251-62, April.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:7319. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.