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Buyer Subsidies in an Equilibrium Model of Price Dispersion

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  • Henrik Orzen
  • Martin Sefton

Abstract

We present a model of equilibrium price dispersion in which a per-unit subsidy to buyers can reduce average prices. The reason is that subsidies have two effects on average prices that work in opposite directions. First, subsidies raise buyers' willingness-to-pay, and by itself this causes firms to charge higher prices. However, since a higher willingness-to-pay lowers the relative cost of search, subsidies also induce more search. This creates a second effect that puts pressure on firms to reduce prices. We show that the second effect can dominate, thus causing an overall reduction in average price. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd 2003.

Suggested Citation

  • Henrik Orzen & Martin Sefton, 2003. "Buyer Subsidies in an Equilibrium Model of Price Dispersion," German Economic Review, Verein für Socialpolitik, vol. 4, pages 497-501, November.
    • Handle: RePEc:bla:germec:v:4:y:2003:i::p:497-501
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    References listed on IDEAS

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    1. Wilde, Louis L, 1992. "Comparison Shopping as a Simultaneous Move Game," Economic Journal, Royal Economic Society, vol. 102(412), pages 562-569, May.
    2. Dennis C. Mueller & B. Burcin Yurtoglu, 2000. "Country Legal Environments and Corporate Investment Performance," German Economic Review, Verein für Socialpolitik, vol. 1(2), pages 187-220, May.
    3. Ekkehard Kessner & Mattias K. Polborn, 2000. "A New Test of Price Dispersion," German Economic Review, Verein für Socialpolitik, vol. 1(2), pages 221-240, May.
    4. Louis L. Wilde & Alan Schwartz, 1979. "Equilibrium Comparison Shopping," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 46(3), pages 543-553.
    5. Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 465-491.
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