A Simple Model of Equilibrium Price Dispersion

Abstract

This paper demonstrates that price dispersion can exist even within the context of a very simple model. Identical buyers with elastic demand curves sample sequentially from a known price distribution, at a fixed cost per observation. Firms are assumed to be perfectly informed of buyers' reservation prices and demand functions. Given the firms' distribution of marginal costs, firms' behavior as monopolistic competitors results in their offering a distribution of prices which is consistent with expected utility maximization by buyers and with expected profit maximization by sellers.