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Buyer Subsidies in an Equilibrium Model of Price Dispersion

Author

Listed:
  • Orzen Henrik

    (University of Nottingham,Nottingham, United Kingdom of Great Britain and Northern Ireland)

  • Sefton Martin

    (University of Nottingham,Nottingham, United Kingdom of Great Britain and Northern Ireland)

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.

Suggested Citation

  • Orzen Henrik & Sefton Martin, 2003. "Buyer Subsidies in an Equilibrium Model of Price Dispersion," German Economic Review, De Gruyter, vol. 4(4), pages 497-501, December.
    • Handle: RePEc:bpj:germec:v:4:y:2003:i:4:p:497-501
    DOI: 10.1111/j.1465-6485.2003.00091.x
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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. 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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    Keywords

    Price dispersion; search;

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