Non-Reservation Price Equilibria and Search Without Priors

Author(s)
Anton Sobolev , Alexei Parakhonyak
Abstract

In this paper we analyse a model of oligopolistic competition in which consumers search without priors. Consumers do not have prior beliefs about the distribution of prices charged by firms and thus try to use a robust search procedure: they minimize the loss relative to the searcher, who knows the price distribution, in the worst case scenario. We show that the optimal stopping rule is stochastic and that for any distribution of search costs there is a unique market equilibrium which is characterized by price dispersion. Although listed prices approach the monopoly price as the number of
firms increases, the effective price paid by consumers does not depend on the number of firms. We show that prices in our model are lower than those in a model where consumers know the distribution of prices.

Organisation(s)
Department of Economics
Journal
The Economic Journal
Volume
125
Pages
887-909
ISSN
0013-0133
DOI
https://doi.org/10.1111/ecoj.12265
Publication date
05-2015
Publication status
Published
Peer reviewed
Yes
Austrian Fields of Science 2012
502021 Microeconomics, 502047 Economic theory, 502013 Industrial economics
Keywords
consumer search, search without priors, robust search, Diamond paradox, non-reservation price equilibrium
Portal url
https://ucris.univie.ac.at/portal/en/publications/nonreservation-price-equilibria-and-search-without-priors(336a0b95-7765-473a-94d9-9453416913ae).html