Competitive Prices in Markets with Search and Information FrictionsCSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy Abstract: This paper introduces directed search into the sequential search model of Diamond (1971) by allowing buyers to observe the distribution of prices charged by two (or more) distinct subgroups of firms in the market. This enables buyers to direct their searches towards the most desirable group of firms. Search within groups remains random since price information about each of the groups is imperfect, as in a standard setup. I find that competitive pricing is then the unique equilibrium outcome. This holds even when different buyers observe very different groups of firms and face different and strictly positive levels of search costs. Considering an explicit learning scheme the paper shows that convergence of prices to competitive equilibrium depends crucially on the level of search costs and the number of groups observed by buyers. Lower search costs and a higher number of observed groups generate a higher price elasticity of demand and thereby favor the emergence of competitive prices. Keywords: Diamond paradox; competitive pricing; random and directed sequential search; equilibrium search model; learning (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:55 Access Statistics for this paper More papers in CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.