Working Paper: CEPR ID: DP4618
Authors: Simon P. Anderson; Andr de Palma
Abstract: We describe firm pricing when consumers follow simple reservation price rules. In stark contrast to other models in the literature, this approach yields price dispersion in pure strategies even when firms have the same marginal costs. At the equilibrium, lower price firms earn higher profits. The range of price dispersion increases with the number of firms: the highest price is the monopoly one, while the lowest price tends to marginal cost. The average transaction price remains substantially above marginal cost even with many firms. The equilibrium pricing pattern is the same when prices are chosen sequentially.
Keywords: Passive search; Price dispersion; Reservation price rule
JEL Codes: C72; D43; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| number of firms (L20) | price dispersion (L11) |
| price dispersion (L11) | profits of lower-priced firms (D22) |
| equilibrium pricing pattern (D41) | price dispersion (L11) |
| passive search conditions (J81) | price dispersion (L11) |