Price setting and competition with search frictions

Noritaka Kudoh

No 203, Discussion paper series. A from Graduate School of Economics and Business Administration, Hokkaido University

Abstract: This paper investigates price determination in a decentralized economy in which buyers' valuations are stochastic and unobservable. In such a market, each buyer's reservation utility depends both on the prevailing price and on the price he actually encounters. The buyer's willingness to trade is shown to be decreasing in the price, and this creates the trade-off for the sellers' price setting. Even though the sellers have incentives to manipulate the buyer's willingness to trade, the economy is not fully competitive; it does not converge to the Walrasian outcome as search frictions disappear. The model is used to study various market structures to explore the nature of market power in search equilibrium. It is shown that price dispersion arises as a result of search frictions and oligopolistic price setting.

Keywords: random search; price setting; competition; oligopoly; C78; D40 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2009-02
New Economics Papers: this item is included in nep-com, nep-dge and nep-ind
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