Price Dispersion and Consumer Reservation Prices

Simon Anderson and André de Palma

No 4618, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We describe firm pricing when consumers follow simple reservation price rules. In stark contrast to other models in the literature, this approach yields price dispersion in pure strategies even when firms have the same marginal costs. At the equilibrium, lower price firms earn higher profits. The range of price dispersion increases with the number of firms: the highest price is the monopoly one, while the lowest price tends to marginal cost. The average transaction price remains substantially above marginal cost even with many firms. The equilibrium pricing pattern is the same when prices are chosen sequentially.

Keywords: Price dispersion; Reservation price rule; Passive search (search for similar items in EconPapers)
JEL-codes: C72 D43 D83 (search for similar items in EconPapers)
Date: 2004-09
New Economics Papers: this item is included in nep-com
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Journal Article: Price Dispersion and Consumer Reservation Prices (2005)
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