Information, Heterogeneous Seller, and Price Dispersion

Abstract

We study a market with homogenous goods in which consumers have heterogeneous price information, and sellers have heterogeneous costs. We extend the Burdett-Judd model of price dispersion by heterogeneous-cost sellers and analyze a pure-strategy equilibrium. We show that prices depend on consumers' price information rather than the total number of sellers in the market. More price information for captive consumers leads to lower prices. However, when informed consumers become even better informed, sellers with higher costs increase prices, and sellers with lower costs decrease prices. We discuss welfare implications and extend the model by simultaneous search and price discrimination.

Keywords: incomplete information, price dispersion, heterogeneous costs.

JEL Classification: D43, D83, L13