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Equilibrium Price Dispersion with Sequential Search

  • J. Rupert Gatti

    (Trinity College)

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    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.

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    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1368.

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    Date of creation: 01 Aug 2000
    Date of revision:
    Handle: RePEc:ecm:wc2000:1368
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    1. MacMinn, Richard D, 1980. "Search and Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 308-27, April.
    2. Burdett, Kenneth & Malueg, David A., 1981. "The theory of search for several goods," Journal of Economic Theory, Elsevier, vol. 24(3), pages 362-376, June.
    3. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
    4. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-93, June.
    5. 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 418-38, April.
    6. Benabou, Roland, 1988. "Search market equilibrium bilateral heterogeneity and repeat purchases," CEPREMAP Working Papers (Couverture Orange) 8806, CEPREMAP.
    7. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
    8. Albrecht, James W & Axell, Bo & Lang, Harald, 1986. "General Equilibrium Wage and Price Distributions," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 687-706, November.
    9. Diamond, Peter, 1987. "Consumer Differences and Prices in a Search Model," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 429-36, May.
    10. Gatti, J. Rupert J., 1999. "Multi-Commodity Consumer Search," Journal of Economic Theory, Elsevier, vol. 86(2), pages 219-244, June.
    11. Pratt, John W & Wise, David A & Zeckhauser, Richard, 1979. "Price Differences in Almost Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 93(2), pages 189-211, May.
    12. Stahl, Dale O., 1996. "Oligopolistic pricing with heterogeneous consumer search," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 243-268.
    13. McAfee R. Preston, 1995. "Multiproduct Equilibrium Price Dispersion," Journal of Economic Theory, Elsevier, vol. 67(1), pages 83-105, October.
    14. 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.
    15. Axel, Bo, 1977. " Search Market Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(1), pages 20-40.
    16. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
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