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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 prices adaptively in response to current market conditions. With consumer behaviour fixed, convergence to a dispersed price 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: Dec 2000
Date of revision:
Handle: RePEc:edn:esedps:52
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  1. Karl H. Schlag, . "Why Imitate, and if so, How? A Bounded Rational Approach to Multi- Armed Bandits," ELSE working papers 028, ESRC Centre on Economics Learning and Social Evolution.
  2. Benabou, Roland, 1988. "Search market equilibrium bilateral heterogeneity and repeat purchases," CEPREMAP Working Papers (Couverture Orange) 8806, CEPREMAP.
  3. Ed Hopkins, . "Learning, Matching and Aggregation," Discussion Papers 1996-2, Edinburgh School of Economics, University of Edinburgh.
  4. T. Borgers & R. Sarin, 2010. "Learning Through Reinforcement and Replicator Dynamics," Levine's Working Paper Archive 380, David K. Levine.
  5. Joerg Oechssler & Frank Riedel, 1998. "Evolutionary Dynamics on Infinite Strategy Spaces," Game Theory and Information 9805002, EconWPA, revised 12 May 1998.
  6. 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.
  7. Hopkins, Ed, 1999. "A Note on Best Response Dynamics," Games and Economic Behavior, Elsevier, vol. 29(1-2), pages 138-150, October.
  8. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
  9. Wilde, Louis L, 1992. "Comparison Shopping as a Simultaneous Move Game," Economic Journal, Royal Economic Society, vol. 102(412), pages 562-69, May.
  10. 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.
  11. 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..
  12. 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.
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