Working Paper: CEPR ID: DP10456
Authors: Saul Lach; Jos Luis Moraga-Gonzalez
Abstract: In markets where price dispersion is prevalent the relevant question is not what happens to theprice when the number of firms changes but, instead, what happens to the whole distribution ofequilibrium prices. Using data from the gasoline market in the Netherlands, we find, first, thatmarkets with a given number of competitors have price distributions that first-order stochasticallydominate the corresponding price distributions in markets with one more firm. Second, thecompetitive response varies along the price distribution and is stronger at prices in the mediumto upper part of the distribution. Finally, simulations of the consumer gains from competitionreveal that they depend on how well informed consumers are and would be larger for relativelyattentive consumers. A generalisation of Varian's (1980) model allowing for richer heterogeneityin consumer price information along the lines of Burdett and Judd's (1983) model can accountfor these empirical patterns.
Keywords: Distribution of price information; Number of competitors; Price dispersion
JEL Codes: D43; D83; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Number of competitors (L13) | Price distribution (D39) |
| Price distribution (D39) | Consumer gains from competition (D41) |
| Number of competitors (L13) | Price distribution at medium to upper deciles (D39) |
| Market area size (R12) | Estimated impact of adding an additional gas station (F69) |
| Consumer awareness about prices (D18) | Consumer gains from competition (D41) |