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A simple model of price dispersion

Listed author(s):
  • Chudik, Alexander

    (Federal Reserve Bank of Dallas)

This article considers a simple stock-flow matching model with fully informed market participants. Unlike in the standard matching literature, prices are assumed to be set ex-ante. When sellers pre-commit themselves to sell their products at an advertised price, the unique equilibrium is characterized by price dispersion due to the idiosyncratic match payoffs (in a marketplace with full information). This provides new insights into the price dispersion literature, where price dispersion is commonly assumed to be generated by a costly search of uninformed buyers.

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File URL: http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0112.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 112.

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Length: 8 pages
Date of creation: 2012
Handle: RePEc:fip:feddgw:112
Note: Published as: Chudik, Alexander (2012), "A Simple Model of Price Dispersion," Economics Letters 117 (1): 344-347.
Contact details of provider: Web page: http://www.dallasfed.org/
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  1. Axel, Bo, 1977. " Search Market Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(1), pages 20-40.
  2. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April.
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  13. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 465-491.
  14. Preston McAfee, R. & McMillan, John, 1988. "Search mechanisms," Journal of Economic Theory, Elsevier, vol. 44(1), pages 99-123, February.
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  16. Coles, Melvyn G, 1999. "Turnover Externalities with Marketplace Trading," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 851-868, November.
  17. Anonymous, 1994. "Research Updates," Journal of Food Distribution Research, Food Distribution Research Society, vol. 25(1), pages -, February.
  18. MacMinn, Richard D, 1980. "Search and Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 308-327, April.
  19. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-493, June.
  20. Wilde, Louis L., 1977. "Labor market equilibrium under nonsequential search," Journal of Economic Theory, Elsevier, vol. 16(2), pages 373-393, December.
  21. John Sutton, 1980. "A Model of Stochastic Equilibrium in a Quasi-Competitive Industry," Review of Economic Studies, Oxford University Press, vol. 47(4), pages 705-722.
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