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Price dispersion and efficiency

Author

Listed:
  • Benjamin Eden

    (Vanderbilt University)

Abstract
The paper distinguishes between rigid price and flexible price versions of the Prescott (1975) “hotels” model. I focus on two dynamic models that allow for storage: The Bental and Eden (1993) model of all year round goods and the more recent Deneckere and Peck (2012) model of seasonal goods. The formulation follows the standard competitive analysis tradition with non-standard definition of markets: The set of markets that open depends on the state of demand. I show that when prices are flexible, the equilibrium outcome is efficient if the probability of becoming active depends on the aggregate state but not on the buyer's type. If prices are rigid the equilibrium outcome is in general not efficient except for the case in which there are no costs for delaying trade. The cost of delay is also relevant for price dispersion: Lower cost of delays leads to lower price dispersion.

Suggested Citation

  • Benjamin Eden, 2013. "Price dispersion and efficiency," Vanderbilt University Department of Economics Working Papers 13-00012, Vanderbilt University Department of Economics.
    • Handle: RePEc:van:wpaper:vuecon-13-00012
    as

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    File URL: http://www.accessecon.com/pubs/VUECON/VUECON-13-00012.pdf
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    References listed on IDEAS

    as
    1. Raymond Deneckere & James Peck, 2012. "Dynamic Competition With Random Demand and Costless Search: A Theory of Price Posting," Econometrica, Econometric Society, vol. 80(3), pages 1185-1247, May.
    2. Bental, Benjamin & Eden, Benjamin, 1993. "Inventories in a Competitive Environment," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 863-886, October.
    3. Raymond Deneckere & Howard P. Marvel & James Peck, 1996. "Demand Uncertainty, Inventories, and Resale Price Maintenance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 885-913.
    4. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March.
    5. Bryant, John, 1980. "Competitive Equilibrium with Price Setting Firms and Stochastic Demand," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(3), pages 619-626, October.
    6. James D. Dana Jr., 1998. "Advance-Purchase Discounts and Price Discrimination in Competitive Markets," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 395-422, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Price dispersion; demand uncertainty; efficiency; sequential trade; inventories; costs of delaying trade; price rigidity;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium

    NEP fields

    This paper has been announced in the following NEP Reports:

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