Price Dispersion and Consumer Reservation Prices

45 Pages Posted: 4 Nov 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: September 2004

Abstract

We describe firm pricing when consumers follow simple reservation price rules. In stark contrast to other models in the literature, this approach yields price dispersion in pure strategies even when firms have the same marginal costs. At the 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. The equilibrium pricing pattern is the same when prices are chosen sequentially.

Keywords: Price dispersion, reservation price rule, passive search

JEL Classification: C72, D43, D83

Suggested Citation

Anderson, Simon P. and De Palma, Andre, Price Dispersion and Consumer Reservation Prices (September 2004). Available at SSRN: https://ssrn.com/abstract=614863

Simon P. Anderson (Contact Author)

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States
804-924-3861 (Phone)
804-982-2904 (Fax)

Andre De Palma

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

Site des Chênes 1
33 boulevard du Port
Cergy-Pontoise, Cédex F-95011
France
33 1 34 25 61 81 (Phone)
33 1 34 25 62 33 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
21
Abstract Views
1,648
PlumX Metrics