Year: 2024
Type: article
Abstract: In product markets, substantial price dispersion exists for transactions of physically identical goods. Moreover, in these markets, incumbent firms sell at higher prices than entrants. This paper presents a theory of price formation under dynamic competition that explains these facts by assuming both that consumers have imperfect access to firms and that their degree of access depends on each firm’s sales history. The model has a unique equilibrium that features randomized pricing strategies, with incumbents always posting higher prices than entrants. For a fixed underlying environment, the equilibrium converges to a stationary equilibrium over time. As firms’ entry and exit rates approach zero, this stationary equilibrium converges to perfect competition.
Source: Economic Theory
Author: Rafael R. Guthmann
Institution: Alberto Hurtado University
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $2,990
OpenAlex ID: W4401691257