EFMD EQUIS CREDITED Industrial Organization Lecture 8 Price Dispersion and Search Theory 學火旦 于 udan university
Binglin Gong Fudan University Industrial Organization Lecture 8 Price Dispersion and Search Theory
Role of information Recall bertrand paradox Incomplete information is one resolution of Bertrand paradox Acquiring information on prices is costly to consumers, and consumers al ways weigh the cost of searching against the expected price reduction associated with the search process
Role of Information • Recall Bertrand paradox • Incomplete information is one resolution of Bertrand paradox. • Acquiring information on prices is costly to consumers, and consumers always weigh the cost of searching against the expected price reduction associated with the search process
Tourist-trap model · Many souvenir shops Guidebook tells distribution of prices (i.e. broadly something like this 5% of stores charge price =10, 95% charge price =20 and so on Costs tourist c in time and expenses to visit a shop and check price or buy(this is what defines the lack of information hence for c =o all the results of standard Bertrand should hold). Lack of information is same thing as saying it is costly to obtain and or process information If price=p, costs p +c if tourist buys from first store and p+ 2c if tourist buys from second store
Tourist-trap Model • Many souvenir shops • Guidebook tells distribution of prices (i.e. broadly something like this 5% of stores charge price =10, 95% charge price =20 and so on). • Costs tourist c in time and expenses to visit a shop and check price or buy (this is what defines the lack of information. Hence for c =0 all the results of standard Bertrand should hold). Lack of information is same thing as saying it is costly to obtain and or process information. • If price = p, costs p + c if tourist buys from first store and p + 2c if tourist buys from second store
Tourist-trap model The big question: Is a competitive price charged?(Recall in standard Bertrand where there is full information competitive price is charged- this is what the text book and in lass we call as the full information price equilibrium) Suppose all stores charge full-information competitive price, Pc This price is equilibrium price only if no seller wants to charge a different price No firm wants to sell for less than pe =marginal cost as it will result in a loss Suppose one firm charges pl-p+8, where a=small positive number just less than c In this case, a consumer still buys from it, so store makes a higher profit. Thus, competitive price cannot be equilibrium price
Tourist-trap Model
Tourist-trap model Monopoly price is pl an equilibrium price? No (Just repeat the previous argument) A firm wants to charge p2Pl+8=P+28 Repeating argument: only possible single price equilibrium is monopoly price where no firm wants to charge more and if it does not pay for a firm to cut price, monopoly price will indeed be an equilibrium price. a deviant firm which with all firms charging the monopoly price will like to lower price only if it can induce new consumers to search for this low price shop Hence it has to lower price by more than the amount of the search
Tourist-trap Model