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The Stability of Price Dispersion under Seller and Consumer Learning

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Abstract

In many markets it is possible to find rival sellers charging different prices for the same good. Earlier research has attempted to explain this phenomenon by demonstrating the existence of dispersed price equilibria when consumers must make use of costly search to discover prices. We ask whether such equilibria can be learnt when sellers adjust prices adaptively in response to current market conditions. With consumer behaviour fixed, convergence to a dispersed price equilibrium is possible in some cases. However, once consumer learning is introduced, the monopoly outcome first found by Diamond (1971) is the only stable equilibrium.

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  • Ed Hopkins & Robert M Seymour, 2000. "The Stability of Price Dispersion under Seller and Consumer Learning," Edinburgh School of Economics Discussion Paper Series 52, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:52
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    Keywords

    learning; evolution; search; price dispersion;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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