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Evolutionary Dynamics of Price Dispersion with Market-Dependent Costs

Author

Listed:
  • Francisco Álvarez

    (Universidad Complutense de Madrid)

  • José-Manuel Rey

    (Universidad Complutense de Madrid
    Harvard University)

  • Raúl G. Sanchis

    (Universidad Complutense de Madrid
    University of Cambridge)

Abstract

The theoretical literature in economics has established causality from cost dispersion to price dispersion in a market for a homogeneous good in which buyers face search cost. In that literature, it is generally assumed that the cost distribution in the market is exogenous. In this paper we explore bidirectional causality between costs and prices, motivated by a long run perspective under which there are entry decisions on the sellers’ side on the basis of information about past prices. Moreover, we assume that decision makers do not have full information about former prices but they have access to a statistical estimate of past prices, typically provided by some external agency. We introduce a evolutionary discrete time model for the interaction of agents in the market which we analyze numerically. We show that, in this scenario of mutual influence between cost and prices, price dispersion (and cost dispersion) prevail in the stationary regime of the market. We provide evidence that features of the stationary price distribution are related with those of the initial distributions of price and costs and, in particular, we characterize initial conditions to deliver stationary leptokurtic price distributions, which have been recently reported to be prevalent in many markets.

Suggested Citation

  • Francisco Álvarez & José-Manuel Rey & Raúl G. Sanchis, 2019. "Evolutionary Dynamics of Price Dispersion with Market-Dependent Costs," Computational Economics, Springer;Society for Computational Economics, vol. 53(3), pages 951-975, March.
    • Handle: RePEc:kap:compec:v:53:y:2019:i:3:d:10.1007_s10614-017-9770-9
    DOI: 10.1007/s10614-017-9770-9
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    References listed on IDEAS

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    1. Greg Kaplan & Guido Menzio, 2015. "The Morphology Of Price Dispersion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 1165-1206, November.
    2. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-969, July.
    3. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    4. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    5. Han Hong & Matthew Shum, 2006. "Using price distributions to estimate search costs," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 257-275, June.
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