Price Dispersion

Simon Anderson () and André de Palma ()

Virginia Economics Online Papers from University of Virginia, Department of Economics

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 equilib- rium 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. (search for similar items in EconPapers)
JEL-codes: D43 D83 C72 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic
Date: Written
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Related works:
Working Paper: Price dispersion (2003)
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