Overhead Cost and Price Behavior: The Role of Market Intransparency, Search, and Price Randomization

Helmut Zink

International Economic Review, 1996, vol. 37, issue 3, 719-33

Abstract: This paper investigates price setting when firms produce with increasing returns and customers are imperfectly informed about prices but can search. A unique randomization equilibrium exists where each customer is offered a random price by each firm known to him. If the number of firms is fixed, then the expected price to be paid by a customer responds countercyclically to variations of demand per customer and remains invariant with respect to variations of the number of customers. This price behavior corresponds well with new evidence on price behavior. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1996
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