Rational Buyers Search When Prices Increase

40 Pages Posted: 16 Aug 2019

See all articles by Luis M. B. Cabral

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

Sonia Gilbukh

City University of New York - Department of Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: August 13, 2019

Abstract

We develop a dynamic pricing model motivated by observed patterns in business-to-business (and some business-to-customer) transactions. Seller costs are perfectly correlated and evolve according to a Markov process. In every period, each buyer observes (for free) the price set by their current supplier, but not the other sellers' prices or the sellers' (common) cost level. By paying a cost s the buyer becomes "active" and benefits from (Bertrand) competition among sellers. We show that there exists a semi-separating equilibrium whereby sellers increase price immediately when costs increase and otherwise decrease price gradually. Moreover, buyers become active when prices increase but not otherwise. In sum, we deliver a theory whereby buyers become active ("search") if and only if their supplier increases price.

Keywords: consumer search, rockets and feathers

JEL Classification: L1

Suggested Citation

Cabral, Luis M. B. and Gilbukh, Sonia, Rational Buyers Search When Prices Increase (August 13, 2019). NYU Stern School of Business. Available at SSRN: https://ssrn.com/abstract=3436800 or http://dx.doi.org/10.2139/ssrn.3436800

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-0858 (Phone)
212-998-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Sonia Gilbukh (Contact Author)

City University of New York - Department of Real Estate ( email )

United States

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