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Complementarity, Search, and Price Dispersion

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  • Michael Rauh

    (Indiana University)

Abstract

We study an equilibrium sequential search model where buyers have potentially downward-sloping demand and with bilateral heterogeneity in buyers' search costs and firms' production costs. We show that downward- sloping demand and heterogeneity in production costs are necessary to ensure price dispersion when buyers have finite willingness to pay. We then show that firms' profits display increasing differences with respect to price and the distribution of prices when the distribution of search costs is 'uniform-like'. It follows that the set of equilibrium price distributions is nonempty and has a largest and smallest element, in the sense of first-order stochastic dominance. Since the high-price equilibrium is strongly focal, equilibrium is therefore effectively unique

Suggested Citation

  • Michael Rauh, 2005. "Complementarity, Search, and Price Dispersion," Game Theory and Information 0508008, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpga:0508008
    Note: Type of Document - pdf; pages: 22
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/game/papers/0508/0508008.pdf
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    References listed on IDEAS

    as
    1. Rauh, Michael T., 2004. "Wage and price controls in the equilibrium sequential search model," European Economic Review, Elsevier, vol. 48(6), pages 1287-1300, December.
    2. Michael R. Baye & John Morgan, 2004. "Price Dispersion in the Lab and on the Internet: Theory and Evidence," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 448-466, Autumn.
    3. 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.
    4. Daniel F. Spulber, 1996. "Market Microstructure and Intermediation," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 135-152, Summer.
    5. Fershtman, Chaim & Fishman, Arthur, 1994. "The 'perverse' effects of wage and price controls in search markets," European Economic Review, Elsevier, vol. 38(5), pages 1099-1112, May.
    6. Rauh, Michael T., 1997. "A Model of Temporary Search Market Equilibrium," Journal of Economic Theory, Elsevier, vol. 77(1), pages 128-153, November.
    7. Roland Benabou, 1992. "Inflation and Efficiency in Search Markets," Review of Economic Studies, Oxford University Press, vol. 59(2), pages 299-329.
    8. 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.
    9. Khan, M. Ali & Sun, Yeneng, 1999. "Non-cooperative games on hyperfinite Loeb spaces1," Journal of Mathematical Economics, Elsevier, vol. 31(4), pages 455-492, May.
    10. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    11. Michael T. Rauh, 2003. "Non-cooperative games with a continuum of players whose payoffs depend on summary statistics," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(4), pages 901-906, June.
    12. Rauh, Michael T., 2007. "Nonstandard foundations of equilibrium search models," Journal of Economic Theory, Elsevier, vol. 132(1), pages 518-529, January.
    13. Reinganum, Jennifer F, 1979. "A Simple Model of Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 851-858, August.
    14. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    15. Robert, Jacques & Stahl, Dale O, II, 1993. "Informative Price Advertising in a Sequential Search Model," Econometrica, Econometric Society, vol. 61(3), pages 657-686, May.
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    More about this item

    Keywords

    Complementarity; supermodularity; search; price dispersion.;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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