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Price Dispersion: An Evolutionary Approach

In many markets it is possible to find rival sellers charging different prices for the same good. Earlier research has explained this phenomenon by demon-strating the existence of dispersed price equilibria when consumers must make use of costly search to discover prices. Taking as a starting point the model of Burdett and Judd (Econometric, 1983), this paper, extending evolutionary techniques to a game with nonlinear payoffs and a continuum of strategies, reexamines the question of price dispersion from an evolutionary, disequilibrium perspective. That is, firms and consumers adjust behaviour adaptively in response to current market conditions. We find that dispersed price equilibria are unstable when consumers use a fixed sample size search rule but may be stable when a reservation price rule is used.

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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series Department of Economics with number 1996 : III.

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Handle: RePEc:edn:edecdp:9603
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  1. Hopkins, E., 1995. "Learning, Matching and Aggregation," G.R.E.Q.A.M. 95a20, Universite Aix-Marseille III.
  2. Bester,Helmut, 1986. "Bargaining,Search costs and equilibrium price distribution," Discussion Paper Serie A 49, University of Bonn, Germany.
  3. Wilde, Louis L & Schwartz, Alan, 1979. "Equilibrium Comparison Shopping," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 543-53, July.
  4. Drew Fudenberg & David Kreps, 2010. "Learning Mixed Equilibria," Levine's Working Paper Archive 415, David K. Levine.
  5. Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug..
  6. Rothschild, Michael, 1973. "Models of Market Organization with Imperfect Information: A Survey," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1283-1308, Nov.-Dec..
  7. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  8. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
  9. Fershtman, C. & Fishman, A., 1989. "Price Cycles And Booms Dynamic Search Equilibrium," Papers 8922, Tilburg - Center for Economic Research.
  10. Harrison, Glenn W & Morgan, Peter, 1990. "Search Intensity in Experiments," Economic Journal, Royal Economic Society, vol. 100(401), pages 478-86, June.
  11. Gastwirth, Joseph L, 1976. "On Probabilistic Models of Consumer Search for Information," The Quarterly Journal of Economics, MIT Press, vol. 90(1), pages 38-50, February.
  12. Salop, Steven & Stiglitz, Joseph E, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 493-510, October.
  13. 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.
  14. Kandori, M. & Mailath, G.J., 1991. "Learning, Mutation, And Long Run Equilibria In Games," Papers 71, Princeton, Woodrow Wilson School - John M. Olin Program.
  15. Benabou Roland, 1993. "Search Market Equilibrium, Bilateral Heterogeneity, and Repeat Purchases," Journal of Economic Theory, Elsevier, vol. 60(1), pages 140-158, June.
  16. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  17. Nachbar, J H, 1990. ""Evolutionary" Selection Dynamics in Games: Convergence and Limit Properties," International Journal of Game Theory, Springer, vol. 19(1), pages 59-89.
  18. Wilde, Louis L, 1992. "Comparison Shopping as a Simultaneous Move Game," Economic Journal, Royal Economic Society, vol. 102(412), pages 562-69, May.
  19. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  20. Morgan, Peter & Manning, Richard, 1985. "Optimal Search," Econometrica, Econometric Society, vol. 53(4), pages 923-44, July.
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