Can Price Dispersion Be Supported Solely by Information Frictions?

Abstract

Yes, but one needs to assume that consumers know the realized price distribution, and that they do not know which firm has what price. Even with identical consumers and identical firms, if firms set prices in a first stage, and if consumers search sequentially in a second stage, then price dispersion arises in the form of a mixed strategy subgame perfect Nash Equilibrium. In contrast to Burdett and Judd (1983), price quotes are not required to be “noisy.” Moreover, actual search is predicted to be nontrivial.

Keywords: Price dispersion, Information frictions, Sequential search

JEL Classification: L13,D83, D21, D43