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Non-reservation price equilibria and Consumer search

Maarten Janssen, Alexei Parakhonyak and Anastasia Parakhonyak ()
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Anastasia Parakhonyak: Toulouse School of Economics.

No WP BRP 51/EC/2014, HSE Working papers from National Research University Higher School of Economics

Abstract: When consumers do not know the prices at which different firms sell, they often also do not know production costs. Consumer search models which take asymmetric information about production costs into account continue focusing on reservation price equilibria (RPE) and their properties. We argue that RPE assume specific out-of-equilibrium beliefs that are not consistent with the logic of the D1 refinement criterion. Moreover, RPE suffer from a non-existence problem as they typically do not exist when cost uncertainty is large. We characterize an alternative class of socalled non-RPE. We show these equilibria always exist and do not rely on specific out-of-equilibrium beliefs. Non-reservation equilibria are characterized by active consumer search among consumers. As cost uncertainty facilitates search, more consumers make price comparisons resulting in stronger price competition between firms and higher consumer surplus.

Keywords: Sequential Search; Non-Reservation Price Equilibria; Asymmetric Information (search for similar items in EconPapers)
JEL-codes: D40 D83 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-cta
Date: 2014
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Published in WP BRP Series: Economics / EC, February 2014, pages 1-54

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Journal Article: Non-reservation price equilibria and consumer search (2017) Downloads
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