Asymmetric Price Effects of Competition

In markets where price dispersion is prevalent the relevant question is not what happens to the price when the number of firms changes but, instead, what happens to the whole distribution of equilibrium prices. Using data from the gasoline market in the Netherlands, we find, first, that markets with a given number of competitors have price distributions that first-order stochastically dominate the corresponding price distributions in markets with one more firm. Second, the competitive response varies along the price distribution and is stronger at prices in the medium to upper part of the distribution. Finally, simulations of the consumer gains from competition reveal that they depend on how well informed consumers are and would be larger for relatively attentive consumers. A generalisation of Varian's (1980) model allowing for richer heterogeneity in consumer price information along the lines of Burdett and Judd's (1983) model can account for these empirical patterns.