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Buyer Search and Price Dispersion: A Laboratory Study

Author

Listed:
  • Timothy N. Cason

    (Purdue Universit)

  • Daniel Friedman

    (University of California)

Abstract

Posted offer markets with costly buyer search are investigated in 18 laboratory sessions. Each period sellers simultaneously post prices. Then each buyer costlessly observes one or (with probability 1-q) two of the posted prices, and either accepts an observed price, drops out, or pays a cost to search again that period. The sessions vary q, the search cost, and the number and kind of buyers. Equilibrium theory predicts a unified very low (very high) price for q=0 (q=1) and predicts specific distributions of dispersed prices for q=1/3 and 2/3. Actual transaction prices conform rather closely to the predictions, especially in treatments with many robot buyers. Individual buyer and seller behavior, however, differs systematically from the equilibrium predictions: buyers' reservation prices are biased away from the extremes and sellers' posted prices have positive autocorrelation and cross sectional correlation. Learning models can account for a portion of these deviations from equilibrium behavior.

Suggested Citation

  • Timothy N. Cason & Daniel Friedman, 2000. "Buyer Search and Price Dispersion: A Laboratory Study," Econometric Society World Congress 2000 Contributed Papers 1549, Econometric Society.
    • Handle: RePEc:ecm:wc2000:1549
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