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Price Distributions And Competition

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Executive Summary

Considerable evidence demonstrates that significant dispersion exists in the prices charged for seemingly homogeneous goods. This paper adopts a simple, flexible equilibrium model of search to investigate the way the market structure influences price dispersion. Using the noisy search approach, the paper demonstrates the effects of having a single large, price-leading firm with multiple outlets and a competitive fringe of small firms with one retail outlet each. Prices are strategic complements. A higher price at any particular outlet increases the expected payoff at those outlets with lower prices thereby generating a positive spillover among outlets. As potential competitors raise their prices, an outlet has an increased incentive to raise its own price.

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