Instability of Endogenous Price Dispersion Equilibria: A Simulation

Lucas Herrenbrueck

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: Models of price posting by firms and search by consumers often feature equilibria with endogenous price dispersion. However, such equilibria are fragile in the sense that an individual firm’s decision problem is not concave (or even well-formed) outside of equilibrium. I simulate various procedures firms may use to update their prices sequentially. I find that the benchmark model performs surprisingly well, but that substantial differences in the level, volatility, and dispersion of profits remain even with as many as 100 firms. Certain procedures for price updating lead to “odd” results such as cyclicality or excessive volatility of prices and profits. When cost dispersion becomes large, prices become less volatile as they are more closely tied to costs.

Keywords: Simulation; search frictions; Burdett-Judd pricing; Edgeworth cycles; disequilibrium dynamics (search for similar items in EconPapers)
JEL-codes: D21 D43 D83 (search for similar items in EconPapers)
Pages: 19
Date: 2015-07-01
New Economics Papers: this item is included in nep-cmp and nep-com
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Related works:
Journal Article: Instability of endogenous price dispersion equilibria: A simulation (2018)
Journal Article: Instability of endogenous price dispersion equilibria: A simulation (2018)
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