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On the Welfare Gains of Price Dispersion

Richard Dutu (), Benoit Julien () and Ian King ()

Journal of Money, Credit and Banking, 2012, vol. 44, issue 5, 757-786

Abstract: Can price dispersion be associated with higher levels of welfare? To answer we compare two economies that differ only in the way prices are formed. In the first, sellers post a unique price–quantity pair, with no price dispersion. In the second, sellers post a quantity only and let prices be determined ex post by realized demand, resulting in price dispersion. We show that while agents trade lower quantities when prices are dispersed (an intensive margin effect), they also trade more often (an extensive margin effect). At low inflation, the extensive margin dominates making agents better off with price dispersion.

Date: 2012
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