Rational Buyers Search When Prices Increase

43 Pages Posted: 7 Oct 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)

Sophia Gilbukh

CUNY Baruch College

Multiple version iconThere are 2 versions of this paper

Date Written: August 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.

JEL Classification: D83

Suggested Citation

Cabral, Luis M. B. and Gilbukh, Sophia, Rational Buyers Search When Prices Increase (August 2019). CEPR Discussion Paper No. DP13940. Available at SSRN: https://ssrn.com/abstract=3464462

Luis M. B. Cabral (Contact Author)

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

269 Mercer Street
New York, NY 10003
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HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Sophia Gilbukh

CUNY Baruch College ( email )

17 Lexington Avenue
New York, NY 10021
United States

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