Learning, Search and Arbitrage - Evidence from a Natural Experiment

Jerzy Konieczny and Andrzej Skrzypacz

No 1131, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: We study the behavior of price dispersion in Poland following the big-bang transition to a market economy in 1990 using a large, disaggregated data set. Intra- and intermarket dispersions fall rapidly in the early stages of transition. This is not fully explained by changes in inflation or in inflation variability. We attribute the initial decline to learning how to set prices in the new environment. Learning is very fast: within 6-12 months dispersion reaches long-run values. There are significant differences in price dispersion across goods throughout the period of study. They are consistent with search for the best price within regions and active arbitrage across regions. Overall agents respond to new opportunities by acting precisely as economic theory predicts they would.

Date: 2000-08-01
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