Search and Price Dispersion in Oligopolies

30 Pages Posted: 7 Aug 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: August 2, 2019

Abstract

We explore equilibrium price dispersion in an oligopolistic product market with search frictions. 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. 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 monotonically. 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 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 (August 2, 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

Register to save articles to
your library

Register

Paper statistics

Downloads
1
Abstract Views
62
PlumX Metrics