Search and Price Dispersion in Oligopolies

32 Pages Posted: 7 Aug 2019 Last revised: 15 Nov 2019

See all articles by Jose Carrasco

Jose Carrasco

Facultad de Ingeniería y Ciencias, Universidad Adolfo Ibañez

Rodrigo Yañez

Universidad Tecnica Federico Santa Maria

Date Written: November 14, 2019

Abstract

We explore equilibrium price dispersion in an oligopolistic product market with search frictions. Consumers know prices, but due to informational frictions, search is random. The distinct feature of our theory is that consumers’ aggregate demand functions are obtained endogenously. We show that price dispersion generically arises if firms have a heterogeneous price impact on consumers’ search strategy, resulting in demand curves with different price elasticities. Otherwise, cost heterogeneity is required. Crucially, this phenomenon only emerges if there is heterogeneity on both sides of the market. As frictions vanish, so does price dispersion, resolving Diamond’s paradox. However, dispersion might not fall mono- tonically. In cases of only one-sided heterogeneity, demand curves are shown to be equally elastic, resulting in a unique equilibrium without dispersion. In particular, if consumers are homogeneous, demand curves are infinitely inelastic, and so, all firms charge the monopolistic price. Our theory provides a common explanation — built on the endogenous demand price elasticity properties — for how heterogeneity leads to price dispersion.

Keywords: Search Theory, Price Dispersion, Dynamic Programming

JEL Classification: D21, D43, D25, D83

Suggested Citation

Carrasco, Jose and Yañez, Rodrigo, Search and Price Dispersion in Oligopolies (November 14, 2019). Available at SSRN: https://ssrn.com/abstract=3431673 or http://dx.doi.org/10.2139/ssrn.3431673

Jose Carrasco (Contact Author)

Facultad de Ingeniería y Ciencias, Universidad Adolfo Ibañez ( email )

2640, Peñalolen
Santiago
Chile

HOME PAGE: http://www.tonocarrasco.com

Rodrigo Yañez

Universidad Tecnica Federico Santa Maria ( email )

Avenida España 1680
Casilla, Valparaíso 110-V
Chile

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