Price Setting and Competition with Search Frictions

30 Pages Posted: 25 Jun 2008  

Noritaka Kudoh

Hokkaido University - Graduate School of Economics & Business Administration

Date Written: 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.

Keywords: random search, price setting, competition, oligopoly

JEL Classification: C78, D40

Suggested Citation

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

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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