DP4618 Price Dispersion and Consumer Reservation Prices

Author(s): Simon P Anderson, André de Palma
Publication Date: September 2004
Keyword(s): passive search, price dispersion, reservation price rule
JEL(s): C72, D43, D83
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4618

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.