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Dynamic Pricing with Search Frictions

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Abstract

This paper studies dynamic pricing in markets with search frictions. Sellers have a single unit of a good and post prices in every trading period. Buyers have to incur a search cost to match with a new seller and upon matching they observe the price and the realization of some idiosyncratic match value. There is no discounting but trade ends at an exogenously given deadline. We show that equilibrium involves trading in finitely many trading periods and the volume of trade increases over time. Under mild conditions on the buyerto- seller ratio and the distribution of valuations, prices decrease at increasing rates as the deadline approaches. We derive the gains from trade in equilibrium and their distribution between buyers and sellers. For the case in which the measures of buyers and sellers coincide, we provide a full characterization of the (unique) equilibrium for a class of distribution functions. We finally discuss implications for market design, including the use of platform fees and cancellation policies.

Suggested Citation

  • Daniel Garcia, 2017. "Dynamic Pricing with Search Frictions," Vienna Economics Papers vie1703, University of Vienna, Department of Economics.
  • Handle: RePEc:vie:viennp:vie1703
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    References listed on IDEAS

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    1. Daniel Garcia & Sandro Shelegia, 2018. "Consumer search with observational learning," RAND Journal of Economics, RAND Corporation, vol. 49(1), pages 224-253, March.
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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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