Price Dispersion, Price Flexibility, and Repeated Purchasing

John McMillan and Peter B. Morgan

Canadian Journal of Economics, 1988, vol. 21, issue 4, 883-902

Abstract: This paper presents a search model in which consumers repeatedly purchase some good. The repetition of purchases leads to the formatio n of implicit contracts with sellers that generate a kink in the demand curve facing each seller. These kinks can generate equilibrium price dispersion under conditions where single-purchase search models predict no price dispersion. Despite the kinks, prices are at least partially flexible in that some, and possibly all, sellers change their prices in response to changes in production costs or demand.

Date: 1988
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