Price dispersion in dynamic competition

Rafael R. Guthmann ()
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Rafael R. Guthmann: Universidad Alberto Hurtado

Economic Theory, 2024, vol. 78, issue 4, No 6, 1203-1232

Abstract: Abstract In product markets, substantial price dispersion exists for transactions of physically identical goods. Moreover, in these markets, incumbent firms sell at higher prices than entrants. This paper presents a theory of price formation under dynamic competition that explains these facts by assuming both that consumers have imperfect access to firms and that their degree of access depends on each firm’s sales history. The model has a unique equilibrium that features randomized pricing strategies, with incumbents always posting higher prices than entrants. For a fixed underlying environment, the equilibrium converges to a stationary equilibrium over time. As firms’ entry and exit rates approach zero, this stationary equilibrium converges to perfect competition.

Keywords: Price dispersion; Customer capital; Dynamic competition; Market frictions (search for similar items in EconPapers)
JEL-codes: C78 D11 D40 D83 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00199-024-01601-9

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