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Equilibrium price dispersion with heterogeneous searchers

Chen, Yongmin and Zhang, Tianle (2009): Equilibrium price dispersion with heterogeneous searchers.

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Abstract

Firms simultaneously set prices in a homogeneous-product market where uninformed consumers search for price information. Some uninformed consumers are local searchers who visit only one seller, possibly due to high search costs or bounded rationality; whereas others search sequentially with an optimal reservation price. Equilibrium prices may follow a mixture distribution, with clusters of high and low prices separated by a zero-density gap. When the departure of their (exogeneous) reservation price from that of the (optimizing) global searchers is relatively small, the presence of local searchers either has no effect on market outcomes or benefits all consumers. A reduction in search cost sometimes leads to higher equilibrium prices.

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