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(Quasi) uniqueness and restoring dynamics of price-dispersion market equilibria under search cost

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  • Álvarez, Francisco
  • Rey, José-Manuel

Abstract

We study existence, uniqueness and restoring dynamics of price-dispersion equilibria in a market for a homogeneous good. We assume that costs are heterogeneous across participating firms. Specifically, we rely on classical extreme value theory and some recent developments on fee-setting mechanisms to consider cost distributions that are Generalized Pareto. Our analysis provides results on the existence and uniqueness of a price-dispersion equilibrium that link the cost dispersion across firms with the search cost of consumers. If the former is large enough compared to the latter, existence and a form of uniqueness of price-dispersion equilibrium arise. In addition, we propose a natural best-response market dynamics that delivers convergence to the price-dispersion equilibrium, even if the market departs slightly from the Diamond paradox equilibrium.

Suggested Citation

  • Álvarez, Francisco & Rey, José-Manuel, 2019. "(Quasi) uniqueness and restoring dynamics of price-dispersion market equilibria under search cost," Journal of Mathematical Economics, Elsevier, vol. 81(C), pages 1-13.
    • Handle: RePEc:eee:mateco:v:81:y:2019:i:c:p:1-13
    DOI: 10.1016/j.jmateco.2018.12.002
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