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.
|Date of creation:||01 Mar 2001|
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- Grether, David M. & Schwartz, Alan & Wilde, Louis L., "undated". "Uncertainty and Shopping Behavior: An Experimental Analysis," Working Papers 511, California Institute of Technology, Division of the Humanities and Social Sciences.
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- Martin Sefton & Abdullah Yavas & Eric Abrams, 2000. "An experimental comparison of two search models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(3), pages 735-749.
- Ed Hopkins & Robert M. Seymour, 2002.
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International Economic Review,
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- Ed Hopkins & Roberty M. Seymour, 2002. "The Stability of Price Dispersion under Seller and Consumer Learning," Game Theory and Information 0203002, EconWPA.
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- Adam, Klaus, 2001. "Learning While Searching for the Best Alternative," Journal of Economic Theory, Elsevier, vol. 101(1), pages 252-280, November.
- Adam, K., 1999. "Learning While Searching for the Beat Alternative," Economics Working Papers eco99/4, European University Institute.
- 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.
- 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 1041-1061, October.
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