EconPapers    
Economics at your fingertips  
 

Rational buyers search when prices increase

Luis Cabral () and Sonia Gilbukh

Journal of Economic Theory, 2020, vol. 187, issue C

Abstract: We develop a dynamic pricing model motivated by observed patterns in business-to-business (and some business-to-customer) transactions. Seller costs are perfectly correlated and evolve according to a Markov process. In every period, each buyer observes (for free) the price set by their current supplier, but not the other sellers' prices or the sellers' (common) cost level. By paying a cost s the buyer becomes “active” and benefits from (Bertrand) competition among sellers. We show that there exists a semi-separating equilibrium whereby sellers increase price immediately when costs increase and otherwise decrease price gradually. Moreover, buyers become active when prices increase but not otherwise. In sum, we deliver a theory whereby buyers become active (“search”) if and only if their supplier increases price.

Keywords: Search; Price adjustment; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D0 D8 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053120300065
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Rational Buyers Search When Prices Increase (2019) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:187:y:2020:i:c:s0022053120300065

DOI: 10.1016/j.jet.2020.104998

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2021-09-11
Handle: RePEc:eee:jetheo:v:187:y:2020:i:c:s0022053120300065