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Equilibrium Price Dispersion with Sequential Search

Author

Listed:
  • Nicholas Trachter

    (Federal Reserve Bank of Richmond)

  • Guido Menzio

    (University of Pennsylvania)

Abstract

We propose a novel theory of equilibrium price dispersion in product markets with search frictions. As in Diamond (1971), buyers search for sellers sequentially. In contrast to Diamond (1971), buyers do not meet all sellers with the same probability. Specifically, a fraction of the buyers’ meetings leads to one particular large seller, while the remaining fraction of the meetings leads to one of a continuum of small sellers. We prove that the unique equilibrium of this model is such that sellers post a non-degenerate distribution of prices and buyers capture a positive fraction of the gains from trade. The fraction of gains from trade accruing to the buyers is hump-shaped with respect to the market power of the large seller. However, for any degree of market power of the large seller, the fraction of gains from trade accruing to the buyers converges to one when search frictions vanish, and converges to zero when search frictions become arbitrarily large.

Suggested Citation

  • Nicholas Trachter & Guido Menzio, 2014. "Equilibrium Price Dispersion with Sequential Search," 2014 Meeting Papers 984, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:984
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    Cited by:

    1. Nemet, Gregory F. & O’Shaughnessy, Eric & Wiser, Ryan & Darghouth, Naïm & Barbose, Galen & Gillingham, Ken & Rai, Varun, 2017. "Characteristics of low-priced solar PV systems in the U.S," Applied Energy, Elsevier, vol. 187(C), pages 501-513.
    2. Dudley Cooke, 2019. "Consumer Search, Incomplete Exchange Rate Pass‐Through, and Optimal Interest Rate Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(2-3), pages 455-484, March.
    3. Olivier Coibion & Yuriy Gorodnichenko & Dmitri Koustas, 2021. "Consumption Inequality and the Frequency of Purchases," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(4), pages 449-482, October.
    4. Baughman, Garth & Rabinovich, Stanislav, 2019. "Self-confirming price dispersion in monetary economies," Journal of Economic Theory, Elsevier, vol. 183(C), pages 284-311.
    5. Chahrour, Ryan & Stevens, Luminita, 2020. "Price dispersion and the border effect," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 135-146.
    6. Ma, Qingyin & Stachurski, John, 2019. "Optimal timing of decisions: A general theory based on continuation values," Journal of Economic Dynamics and Control, Elsevier, vol. 101(C), pages 62-81.
    7. Rafael R. Guthmann, 2025. "Imperfect Competition as a Result of Unawareness," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 67(1), pages 35-53, June.
    8. Nicholas Trachter, 2016. "Price Dispersion When Stores Sell Multiple Goods," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 127-146.
    9. Shi, Shouyong, 2023. "Sequentially mixed search and equilibrium price dispersion," Journal of Economic Theory, Elsevier, vol. 213(C).
    10. Petrikaite, Vaiva & Hämäläinen, Saara, 2018. "Mobility with private information and privacy suppression," CEPR Discussion Papers 12860, C.E.P.R. Discussion Papers.
    11. Gallin, Joshua & Verbrugge, Randal J., 2019. "A theory of sticky rents: Search and bargaining with incomplete information," Journal of Economic Theory, Elsevier, vol. 183(C), pages 478-519.
    12. Jose A. Carrasco & Rodrigo Yañez, 2022. "Sequential search and firm prominence," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(1), pages 209-233, July.
    13. Rao, Neel, 2022. "Search equilibrium with unobservable investment," Games and Economic Behavior, Elsevier, vol. 133(C), pages 300-330.
    14. José Tudón, 2021. "Can price dispersion be supported solely by information frictions?," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 9(1), pages 75-90, April.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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