A Theory of Stable Price Dispersion

Jun 2019 | 873

Authors: David Ronayne David P. Myatt

We propose a two-stage replacement for established “clearinghouse" or “captive and shopper" pricing models: second-stage retail prices are constrained by first-stage list prices. In contrast to the mixed-strategy equilibria of single-stage games, a unique profile of distinct prices is supported by the play of pure strategies along the equilibrium path, and so we predict stable price dispersion. We find novel results in applications to models of sales, product prominence, advertising, and consumer search.

Keywords: price dispersion, clearinghouse models, prominence, advertising, buyer search

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