Working Paper: CEPR ID: DP16268
Authors: Eeva Mauring
Abstract: I analyse a model of partially directed search where searchers decide which firm to visit based on correct, but incomplete, information about firms' prices. Firms' pure strategies are allowed to be price distributions and in the unique symmetric pure-strategy equilibrium the price distributions are nondegenerate. The model's results rationalise empirical observations on promotions and changes in consumer prices: the lowest offered prices are unprofitable, the pdf of the price distribution is increasing, and the lowest prices are decreasing in the number of firms and the search cost.
Keywords: price dispersion; partial information; partially directed search; sales; unprofitable promotions
JEL Codes: D83; D43; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| search costs (D23) | equilibrium price distributions (D39) |
| increase in search costs (D83) | lowest offered prices (D41) |
| increase in search costs (D83) | highest prices (P22) |
| equilibrium price distributions (D39) | frequency of promotions (M51) |
| equilibrium price distributions (D39) | unprofitable trade promotions (L14) |
| unprofitable prices (D41) | increase overall sales (L21) |