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Dynamic price dispersion in Bertrand–Edgeworth competition

Ching-jen Sun

International Journal of Game Theory, 2017, vol. 46, issue 1, 235-261

Abstract: Abstract This paper studies a dynamic oligopoly model of price competition under demand uncertainty. Sellers are endowed with one unit of the good and compete by posting prices in every period. Buyers each demand one unit of the good and have a common reservation price. They have full information regarding the prices posted by each firm in the market; hence, search is costless. The number of buyers coming to the market in each period is random. Demand uncertainty is said to be high if there are at least two non-zero demand states that give a seller different option values of waiting to sell. Our model features a unique symmetric Markov perfect equilibrium in which price dispersion prevails if and only if the degree of demand uncertainty is high. Several testable theoretical implications on the distribution of market prices are derived.

Keywords: Dynamic price dispersion; Demand uncertainty; Capacity constraints (search for similar items in EconPapers)
JEL-codes: D43 L13 L81 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:spr:jogath:v:46:y:2017:i:1:d:10.1007_s00182-016-0531-0