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Complementarity, Search, and Price Dispersion

Michael Rauh ()

Game Theory and Information from EconWPA

Abstract: We study an equilibrium sequential search model where buyers have potentially downward-sloping demand and with bilateral heterogeneity in buyers' search costs and firms' production costs. We show that downward- sloping demand and heterogeneity in production costs are necessary to ensure price dispersion when buyers have finite willingness to pay. We then show that firms' profits display increasing differences with respect to price and the distribution of prices when the distribution of search costs is 'uniform-like'. It follows that the set of equilibrium price distributions is nonempty and has a largest and smallest element, in the sense of first-order stochastic dominance. Since the high-price equilibrium is strongly focal, equilibrium is therefore effectively unique

Keywords: Complementarity; supermodularity; search; price dispersion. (search for similar items in EconPapers)
JEL-codes: C7 D8 (search for similar items in EconPapers)
Date: 2005-08-21
Note: Type of Document - pdf; pages: 22
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