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http://ssrn.com/abstract=1151193
 
 

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Price Setting and Competition with Search Frictions


Noritaka Kudoh


Hokkaido University - Graduate School of Economics & Business Administration

June 25, 2008


Abstract:     
This paper investigates price determination in a decentralized economy in which buyers' valuations are stochastic and unobservable. In such a market, each buyer's reservation utility depends both on the prevailing price and on the price he actually encounters. The buyer's willingness to trade is shown to be decreasing in the price, and this creates the trade-off for the sellers' price setting. Even though the sellers have incentives to manipulate the buyer's willingness to trade, the economy is not fully competitive; it does not converge to the Walrasian outcome as search frictions disappear. The model is used to study various market structures to explore the nature of market power in search equilibrium. It is shown that price dispersion arises as a result of search frictions and oligopolistic price setting.

Number of Pages in PDF File: 30

Keywords: random search, price setting, competition, oligopoly

JEL Classification: C78, D40

working papers series





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Date posted: June 25, 2008  

Suggested Citation

Kudoh, Noritaka, Price Setting and Competition with Search Frictions (June 25, 2008). Available at SSRN: http://ssrn.com/abstract=1151193 or http://dx.doi.org/10.2139/ssrn.1151193

Contact Information

Noritaka Kudoh (Contact Author)
Hokkaido University - Graduate School of Economics & Business Administration ( email )
Kita-ku Kita 9 Nishi 7
Sapporo Hokkaido, 060
Japan
HOME PAGE: http://www.econ.hokudai.ac.jp/~kudoh/
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References:  26

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