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Non-Reservation Price Equilibria And Search Without Priors

Alexei Parakhonyak and Anton Sobolev ()
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Anton Sobolev: Vienna Graduate School of Economics

HSE Working papers from National Research University Higher School of Economics

Abstract: In this paper we analyse a model of oligopolistic competition in which consumers search without priors. Consumers do not have prior beliefs about the distribution of prices charged by rms and thus try to use a robust search procedure: they minimise the loss relative to the searcher, who knows the price distribution, in the worst case scenario. We derive the optimal stopping rule and show that it does not possess the reservation price property. This means that for a range of prices for which consumers stop searching with a probability strictly between zero and one. We show that for any distribution of search costs there is a unique market equilibrium characterised by price dispersion. Therefore search without priors helps resolve the famous Diamond (1971) paradox. We show that although listed prices approach the monopoly price as the number of rms increases, the e ective price paid by consumers does not depend on the number of rms. We show that prices in our model are lower than those in a model where consumers know the distribution of prices. The reason is that consumers actively search in equilibrium, and this pushes prices down. This e ect is so strong that the price decrease more than compensates consumers for their extra search costs.

Keywords: consumer search; search without priors; robust search; Diamond paradox; non-reservation price equilibrium. (search for similar items in EconPapers)
JEL-codes: D83 D43 L11 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2014
New Economics Papers: this item is included in nep-com
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Published in WP BRP Series: Economics / EC, November 2014, pages 1-46

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