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Non-Reservation Price Equilibria And Search Without Priors

Author

Listed:
  • Alexei N. Parakhonyak

    () (National Research University Higher School of Economics)

  • Anton Sobolev

    () (Vienna Graduate School of Economics)

Abstract

In this paper we analyse a model of oligopolistic competition in which consumers search without priors. Consumers do not have prior beliefs about the distribution of prices charged by rms and thus try to use a robust search procedure: they minimise the loss relative to the searcher, who knows the price distribution, in the worst case scenario. We derive the optimal stopping rule and show that it does not possess the reservation price property. This means that for a range of prices for which consumers stop searching with a probability strictly between zero and one. We show that for any distribution of search costs there is a unique market equilibrium characterised by price dispersion. Therefore search without priors helps resolve the famous Diamond (1971) paradox. We show that although listed prices approach the monopoly price as the number of rms increases, the e ective price paid by consumers does not depend on the number of rms. We show that prices in our model are lower than those in a model where consumers know the distribution of prices. The reason is that consumers actively search in equilibrium, and this pushes prices down. This e ect is so strong that the price decrease more than compensates consumers for their extra search costs.

Suggested Citation

  • Alexei N. Parakhonyak & Anton Sobolev, 2014. "Non-Reservation Price Equilibria And Search Without Priors," HSE Working papers WP BRP 69/EC/2014, National Research University Higher School of Economics.
  • Handle: RePEc:hig:wpaper:69/ec/2014
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    References listed on IDEAS

    as
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    Cited by:

    1. Karl Schlag & Andriy Zapechelnyuk, 2017. "Robust Sequential Search," Discussion Paper Series, Department of Economics 201803, Department of Economics, University of St. Andrews.
    2. Janssen, Maarten C.W. & Parakhonyak, Alexei & Parakhonyak, Anastasia, 2017. "Non-reservation price equilibria and consumer search," Journal of Economic Theory, Elsevier, vol. 172(C), pages 120-162.

    More about this item

    Keywords

    consumer search; search without priors; robust search; Diamond paradox; non-reservation price equilibrium.;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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