Price Dispersion in a Model of Identical Agents with Perfect Information

In the literature explanations of price dispersion invariably depend on the assumptions of imperfect information and/or some form of heterogeneity among either consumers or firms. The objective of this paper is to demonstrate that price dispersion is possible even in a world of perfect information and identical consumers and firms. The driving force in our model is service capacity and congestion cost. Each firm chooses a service capacity (the size of a store). Customers of a firm bear a congestion cost which, for a fixed service capacity, is an increasing function of the number of customers served by this firm. We demonstrate the existence of an equilibrium where firms choose different service capacities and charge different prices for the same product. The results of this model are consistent with the empirical findings by Png and Reitman (1994) on price dispersion in gasoline retailing.