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The Stability of Price Dispersion under Seller and Consumer Learning

In many markets it is possible to find rival sellers charging different prices for the same good. Earlier research has attempted to explain this phenomenon by demonstrating the existence of dispersed price equilibria when consumers must make use of costly search to discover prices. We ask whether such equilibria can be learnt when sellers adjust proces adaptively in response to current market conditions. With consumer behaviour fixed, convergence to a dispersed porce equilibrium is possible in some cases. However, once consumer learning is introduced, the monopoly outcome first found by Diamond (1971) is the only stable equilibrium.

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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 52.

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Length: 36
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:edn:esedps:52
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  1. 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..
  2. Schlag, Karl H., 1994. "Why Imitate, and if so, How? Exploring a Model of Social Evolution," Discussion Paper Serie B 296, University of Bonn, Germany.
  3. Joerg Oechssler & Frank Riedel, 1998. "Evolutionary Dynamics on Infinite Strategy Spaces," Game Theory and Information 9805002, EconWPA, revised 12 May 1998.
  4. Ed Hopkins, . "Learning, Matching and Aggregation," ESE Discussion Papers 2, Edinburgh School of Economics, University of Edinburgh.
  5. Tilman B�rgers & Rajiv Sarin, . "Learning Through Reinforcement and Replicator Dynamics," ELSE working papers 051, ESRC Centre on Economics Learning and Social Evolution.
  6. Benabou, Roland, 1988. "Search market equilibrium bilateral heterogeneity and repeat purchases," CEPREMAP Working Papers (Couverture Orange) 8806, CEPREMAP.
  7. Cason, Timothy N. & Friedman, Daniel, 2003. "Buyer search and price dispersion: a laboratory study," Journal of Economic Theory, Elsevier, vol. 112(2), pages 232-260, October.
  8. Karl H. Schlag, 1995. "Why Imitate, and if so, How? A Bounded Rational Approach to Multi-Armed Bandits," Discussion Paper Serie B 361, University of Bonn, Germany, revised Mar 1996.
  9. Hopkins, Ed, 1999. "A Note on Best Response Dynamics," Games and Economic Behavior, Elsevier, vol. 29(1-2), pages 138-150, October.
  10. Erev, Ido & Roth, Alvin E, 1998. "Predicting How People Play Games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy Equilibria," American Economic Review, American Economic Association, vol. 88(4), pages 848-81, September.
  11. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
  12. Wilde, Louis L, 1992. "Comparison Shopping as a Simultaneous Move Game," Economic Journal, Royal Economic Society, vol. 102(412), pages 562-69, May.
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