Oligopolistic Price Competition with Informed and Uninformed Buyers

CERGE-EI Working Paper Series No. 413

34 Pages Posted: 29 Aug 2010

See all articles by Michal Ostatnický

Michal Ostatnický

CERGE-EI, Center For Econ Research & Grad Education, and Econ Institute, Prague

Date Written: August 1, 2010

Abstract

The standard price competition of two or more players leads to Bertrand equilibrium in basic economic theory (if complete information is assumed, there are no capacity constraints, etc.). In reality, even on highly competitive Internet-based markets, the prices of seemingly undifferentiated goods (e.g. books and CDs on Amazon and similar e-shops) vary, although competition seems prima facie based on prices. I follow the literature that originated with Varian’s (1980) model, especially Kocas and Kiyak (2006), and analyze oligopolistic markets where buyers have reservation values drawn from a common distribution function rather than a single value (inelastic demand), as typically assumed in the models of Varian’s or Kocas and Kiyak’s type. The model presented in this paper is developed from the simplest symmetric set-up (uninformed buyers are assigned to sellers evenly) to the most complex asymmetric set-up with many competing sellers (uninformed buyers are distributed over sellers unevenly). The most complex set-up theoretically rationalizes the empirical findings of Kocas and Kiyak. In the equilibrium of my model, all sellers randomly choose prices from a non-trivial interval for (almost) every seller, while in Kocas and Kiyak’s theoretical model only two sellers randomize while others always offer the same price.

Keywords: oligopoly, price competition, price dispersion

JEL Classification: L11, D43

Suggested Citation

Ostatnicky, Michal, Oligopolistic Price Competition with Informed and Uninformed Buyers (August 1, 2010). CERGE-EI Working Paper Series No. 413. Available at SSRN: https://ssrn.com/abstract=1667064 or http://dx.doi.org/10.2139/ssrn.1667064

Michal Ostatnicky (Contact Author)

CERGE-EI, Center For Econ Research & Grad Education, and Econ Institute, Prague ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

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