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Competitive Prices in Markets with Search and Information Frictions

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.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 55.

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Date of creation: 01 Mar 2001
Date of revision:
Handle: RePEc:sef:csefwp:55
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  1. Stiglitz, Joseph E, 1987. "Competition and the Number of Firms in a Market: Are Duopolies More Competitive than Atomistic Markets?," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1041-61, October.
  2. David, Douglas D & Holt, Charles A, 1996. "Consumer Search Costs and Market Performance," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 133-51, January.
  3. John W. Pratt & David A. Wise & Richard Zeckhauser, 1979. "Price Differences in almost Competitive Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 93(2), pages 189-211.
  4. Ed Hopkins & Roberty M. Seymour, 2002. "The Stability of Price Dispersion under Seller and Consumer Learning," Game Theory and Information 0203002, EconWPA.
  5. Martin Sefton & Abdullah Yavas & Eric Abrams, 2000. "An experimental comparison of two search models," Economic Theory, Springer, vol. 16(3), pages 735-749.
  6. Weitzman, Martin L, 1979. "Optimal Search for the Best Alternative," Econometrica, Econometric Society, vol. 47(3), pages 641-54, May.
  7. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  8. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June.
  9. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  10. repec:bla:restud:v:55:y:1988:i:2:p:323-42 is not listed on IDEAS
  11. Grether, David M. & Schwartz, Alan & Wilde, Louis L., . "Uncertainty and Shopping Behavior: An Experimental Analysis," Working Papers 511, California Institute of Technology, Division of the Humanities and Social Sciences.
  12. Rafael Rob, 1985. "Equilibrium Price Distributions," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 487-504.
  13. Bradley J. Ruffle, 2000. "Some factors affecting demand withholding in posted-offer markets," Economic Theory, Springer, vol. 16(3), pages 529-544.
  14. Adam, Klaus, 2001. "Learning While Searching for the Best Alternative," Journal of Economic Theory, Elsevier, vol. 101(1), pages 252-280, November.
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