Sequential Search with Incompletely Informed Consumers: Theory and Evidence from Retail Gasoline Markets
A large variety of markets, such as retail markets for gasoline or mortgage markets, are characterized by a small number of firms offering a fairly homogenous product at virtually the same cost, while consumers, being uninformed about this cost, sequentially search for low prices. The present paper provides a theoretical examination of this type of market, and confronts the theory with data on retail gasoline prices. We develop a sequential search model with incomplete information and characterize a perfect Bayesian equilibrium in which consumers follow simple reservation price strategies. Firms strategically exploit consumers being uninformed about their production cost, and set on average higher prices compared to the standard complete information model. Thus, consumer welfare is lower. Using data on the gasoline retail market in Vienna (Austria), we further argue that incomplete information is a necessary feature to explain observed gasoline prices within a sequential search framework.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fershtman, Chaim & Fishman, Arthur, 1992.
"Price Cycles and Booms: Dynamic Search Equilibrium,"
American Economic Review,
American Economic Association, vol. 82(5), pages 1221-33, December.
- Fershtman, C. & Fishman, A., 1989. "Price Cycles And Booms Dynamic Search Equilibrium," Papers 8922, Tilburg - Center for Economic Research.
- Fershtman, C. & Fishman, A., 1989. "Price Cycles And Booms: Dynamic Search Equilibrium," Papers 1-89, Tel Aviv.
- Lewis, Matt, 2004.
"Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market,"
Competition Policy Center, Working Paper Series
qt9pv2d9fn, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
- Matthew S. Lewis, 2011. "Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 409-449, 06.
- Matt Lewis, 2004. "Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market," Industrial Organization 0407010, EconWPA.
- Gershkov, Alex & Moldovanu, Benny, 2012.
"Optimal search, learning and implementation,"
Journal of Economic Theory,
Elsevier, vol. 147(3), pages 881-909.
- Dana, James D, Jr, 1994.
"Learning in an Equilibrium Search Model,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 745-71, August.
- Ambarish Chandra & Mariano Tappata, 2011. "Consumer search and dynamic price dispersion: an application to gasoline markets," RAND Journal of Economics, RAND Corporation, vol. 42(4), pages 681-704, December.
- Reinganum, Jennifer F, 1979.
"A Simple Model of Equilibrium Price Dispersion,"
Journal of Political Economy,
University of Chicago Press, vol. 87(4), pages 851-58, August.
- Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
- Maarten C.W. Janssen & Alexei Parakhonyak, 2007. "Optimal Search with Costly Recall," Tinbergen Institute Discussion Papers 08-002/1, Tinbergen Institute.
- Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug..
- Mariano Tappata, 2009. "Rockets and feathers: Understanding asymmetric pricing," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 673-687.
- Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
- Saul Lach, 2007.
"Immigration and Prices,"
Journal of Political Economy,
University of Chicago Press, vol. 115(4), pages 548-587, 08.
- Glenn Ellison & Sara Fisher Ellison, 2009.
"Search, Obfuscation, and Price Elasticities on the Internet,"
Econometric Society, vol. 77(2), pages 427-452, 03.
- Glenn Ellison & Sara Fisher Ellison, 2004. "Search, Obfuscation, and Price Elasticities on the Internet," NBER Working Papers 10570, National Bureau of Economic Research, Inc.
- Justine S. Hastings, 2004. "Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California," American Economic Review, American Economic Association, vol. 94(1), pages 317-328, March.
- Ran Spiegler, 2005.
"Competition over Agents with Boundedly Rational Expectations,"
122247000000000535, UCLA Department of Economics.
- Spiegler, Ran, 2006. "Competition over agents with boundedly rational expectations," Theoretical Economics, Econometric Society, vol. 1(2), pages 207-231, June.
- Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
- Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
- Glenn Ellison & Alexander Wolitzky, 2012.
"A search cost model of obfuscation,"
RAND Journal of Economics,
RAND Corporation, vol. 43(3), pages 417-441, 09.
- Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
- 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.
- Arthur Fishman, 1996. "Search with Learning and Price Adjustment Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 111(1), pages 253-268.
- Armstrong, Mark & Vickers, John & Zhou, Jidong, 2008.
"Consumer protection and the incentive to become informed,"
9898, University Library of Munich, Germany.
- Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Consumer Protection and the Incentive to Become Informed," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 399-410, 04-05.
- Janssen, Maarten C.W. & Moraga-Gonzalez, Jose Luis & Wildenbeest, Matthijs R., 2005. "Truly costly sequential search and oligopolistic pricing," International Journal of Industrial Organization, Elsevier, vol. 23(5-6), pages 451-466, June.
- Matthew Lewis, 2008. "PRICE DISPERSION AND COMPETITION WITH DIFFERENTIATED SELLERS -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 654-678, 09.
- Moraga-González, José Luis & Wildenbeest, Matthijs R., 2008.
"Maximum likelihood estimation of search costs,"
European Economic Review,
Elsevier, vol. 52(5), pages 820-848, July.
- Hosken, Daniel S. & McMillan, Robert S. & Taylor, Christopher T., 2008. "Retail gasoline pricing: What do we know?," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1425-1436, November.
- Kohn, Meir G. & Shavell, Steven, 1974. "The theory of search," Journal of Economic Theory, Elsevier, vol. 9(2), pages 93-123, October.
When requesting a correction, please mention this item's handle: RePEc:vie:viennp:0914. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paper Administrator)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.