Price Dispersion

39 Pages Posted: 26 Mar 2004

See all articles by Simon P. Anderson

Simon P. Anderson

University of Virginia - Department of Economics

Andre de Palma

University of Cergy-Pontoise - Department of Economics

Date Written: December 2003

Abstract

We describe firm pricing when consumers search passively and follow simple reservation price rules. In stark contrast to other models in the literature, this approach yields equilibrium price dispersion in pure strategies even when firms have the same marginal costs. In equilibrium, lower price firms earn higher profits. The range of price dispersion increases with the number of firms: the highest price is the monopoly one, while the lowest price tends to marginal cost. The average transaction price remains substantially above marginal cost even with many firms. Introducing shoppers who buy from the cheapest firm may increase market prices.

Keywords: Price dispersion, reservation price rule, passive search

JEL Classification: D43, D83, C72

Suggested Citation

Anderson, Simon P. and De Palma, Andre, Price Dispersion (December 2003). Available at SSRN: https://ssrn.com/abstract=520482 or http://dx.doi.org/10.2139/ssrn.520482

Simon P. Anderson (Contact Author)

University of Virginia - Department of Economics ( email )

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Andre De Palma

University of Cergy-Pontoise - Department of Economics ( email )

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