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Equilibrium Price Dispersion with Sequential Search

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  • J. Rupert Gatti

    (Trinity College)

Abstract

Diamond (1971) showed that in a market where consumers search sequentially and have strictly positive search costs the unique price equilibrium is where all firms charge the monopoly price. This paper demonstrates that Diamond's result depends crucially on the assumption of single commodity search and does not persist when the model is generalised to allow multi-commodity search. A model is presented where identical consumers search optimally (sequentially) and with positive search costs for two commodities. Firms supply only one of the commodity types so consumers are required to sample at least two firms to satisfy their consumption requirements. Within industries firms are identical, producing a homogenous product at the same, constant, marginal cost. The equilibrium is shown to display price dispersion, in fact no two firms charge the same price with positive probability. Comparative statics are conducted and it is demonstrated that the price dispersion depends solely on the search behaviour of consumers, converging to the competitive price as search costs converge to zero. Changes in industry demand effect equilibrium prices only through the indirect impact the change in demand has on the consumers search behaviour.

Suggested Citation

  • J. Rupert Gatti, 2000. "Equilibrium Price Dispersion with Sequential Search," Econometric Society World Congress 2000 Contributed Papers 1368, Econometric Society.
  • Handle: RePEc:ecm:wc2000:1368
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    References listed on IDEAS

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    1. Peter Diamond, 1987. "Consumer Differences and Prices in a Search Model," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 429-436.
    2. Stahl, Dale O., 1996. "Oligopolistic pricing with heterogeneous consumer search," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 243-268.
    3. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-493, June.
    4. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    5. Axel, Bo, 1977. " Search Market Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(1), pages 20-40.
    6. Benabou Roland, 1993. "Search Market Equilibrium, Bilateral Heterogeneity, and Repeat Purchases," Journal of Economic Theory, Elsevier, vol. 60(1), pages 140-158, June.
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    8. Thomas W. PAULSEN & Thomas VON UNGERN-STERNBERG, 1992. "Price Dispersion and Search Costs with Differentiation Goods," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9202, Université de Lausanne, Faculté des HEC, DEEP.
    9. James W. Albrecht & Bo Axell & Harald Lang, 1986. "General Equilibrium Wage and Price Distributions," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 687-706.
    10. Gatti, J. Rupert J., 1999. "Multi-Commodity Consumer Search," Journal of Economic Theory, Elsevier, vol. 86(2), pages 219-244, June.
    11. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 418-438, April.
    12. MacMinn, Richard D, 1980. "Search and Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 308-327, April.
    13. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    14. McAfee R. Preston, 1995. "Multiproduct Equilibrium Price Dispersion," Journal of Economic Theory, Elsevier, vol. 67(1), pages 83-105, October.
    15. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
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    Cited by:

    1. Michael R. Baye & John Morgan, 2004. "Price Dispersion in the Lab and on the Internet: Theory and Evidence," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 448-466, Autumn.
    2. Dhar, Tirtha & Stiegert, Kyle W. & Gould, Brian W., 2002. "Price Dispersion, Search, and Market Power," Working Papers 201549, University of Wisconsin-Madison, Department of Agricultural and Applied Economics, Food System Research Group.
    3. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Persistent Price Dispersion in Online Markets," Chapters,in: The New Economy and Beyond, chapter 6 Edward Elgar Publishing.
    4. Sun, Ching-jen, 2005. "Dynamic Price Dispersion in a Bertrand-Edgeworth Model," MPRA Paper 9854, University Library of Munich, Germany, revised Dec 2007.
    5. Saul Lach, 2002. "Existence And Persistence Of Price Dispersion: An Empirical Analysis," The Review of Economics and Statistics, MIT Press, vol. 84(3), pages 433-444, August.

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