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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 demonstrating 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 (Econometrica, 1983), this paper, extending evolutionary techniques to a game with non-linear payoffs and a continuum of strategies, re-examines 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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File URL: http://www.econ.ed.ac.uk/papers/id1_esedps.pdf
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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 1.

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Length: 6
Date of creation: Feb 1996
Date of revision:
Handle: RePEc:edn:esedps:1
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  1. Morgan, Peter & Manning, Richard, 1985. "Optimal Search," Econometrica, Econometric Society, vol. 53(4), pages 923-44, July.
  2. Wilde, Louis L. & Schwartz, Alan., . "Equilibrium Comparison Shopping," Working Papers 184, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Ed Hopkins, 1995. "Learning, Matching and Aggregation," Game Theory and Information 9512001, EconWPA.
  4. Fudenberg, D. & Kreps, D.M., 1992. "Learning Mixed Equilibria," Working papers 92-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  6. Bester, Helmut, 1988. "Bargaining, Search Costs and Equilibrium Price Distributions," Review of Economic Studies, Wiley Blackwell, vol. 55(2), pages 201-14, April.
  7. M. Kandori & G. Mailath & R. Rob, 1999. "Learning, Mutation and Long Run Equilibria in Games," Levine's Working Paper Archive 500, David K. Levine.
  8. Wilde, Louis L, 1992. "Comparison Shopping as a Simultaneous Move Game," Economic Journal, Royal Economic Society, vol. 102(412), pages 562-69, May.
  9. Benabou Roland, 1993. "Search Market Equilibrium, Bilateral Heterogeneity, and Repeat Purchases," Journal of Economic Theory, Elsevier, vol. 60(1), pages 140-158, June.
  10. 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..
  11. Fershtman, C. & Fishman, A., 1989. "Price Cycles And Booms: Dynamic Search Equilibrium," Papers 1-89, Tel Aviv.
  12. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  13. Harrison, Glenn W & Morgan, Peter, 1990. "Search Intensity in Experiments," Economic Journal, Royal Economic Society, vol. 100(401), pages 478-86, June.
  14. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
  15. 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.
  16. 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.
  17. Steven Salop & Joseph Stiglitz, 1977. "Bargains and ripoffs: a model of monopolistically competitive price dispersion," Special Studies Papers 94, Board of Governors of the Federal Reserve System (U.S.).
  18. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  19. 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..
  20. 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.
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