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Competitive Prices in Markets with Search and Information Frictions

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Abstract

This paper introduces directed search into the sequential search model of Diamond (1971) by allowing buyers to observe the distribution of prices charged by two (or more) distinct subgroups of firms in the market. This enables buyers to direct their searches towards the most desirable group of firms. Search within groups remains random since price information about each of the groups is imperfect, as in a standard setup. I find that competitive pricing is then the unique equilibrium outcome. This holds even when different buyers observe very different groups of firms and face different and strictly positive levels of search costs. Considering an explicit learning scheme the paper shows that convergence of prices to competitive equilibrium depends crucially on the level of search costs and the number of groups observed by buyers. Lower search costs and a higher number of observed groups generate a higher price elasticity of demand and thereby favor the emergence of competitive prices.

Suggested Citation

  • Klaus Adam, 2001. "Competitive Prices in Markets with Search and Information Frictions," CSEF Working Papers 55, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:55
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    References listed on IDEAS

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    More about this item

    Keywords

    Diamond paradox; competitive pricing; random and directed sequential search; equilibrium search model; learning;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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