Price Dispersion with Directed Search.

Abstract

We study a market where identical capacity-constrained sellers compete to attract identical buyers, via price advertisements. Once buyers reach a store, prices might be renegotiable in a manner that is responsive to excess demand. We focus strongly symmetric equilibria, proving their existence and providing explicit solutions for the distributions of advertised and sale prices as functions of market characteristics. Since variations in the posted price can affect the store’s attractiveness and the incidence of haggling, the model endogenizes the ‘pricing convention’ prevailing in the market and generates several empirically testable predictions on market behavior.Directed Search ; Endogenous Trading Mechanisms ; Market Frictions ; Price Dispersion