Consumer search and dynamic price dispersion: an application to gasoline markets

Abstract

This article studies the role of imperfect information in explaining price dispersion. We use a new panel data set on the U.S. retail gasoline industry and propose a new test of temporal price dispersion to establish the importance of consumer search. We show that price rankings vary significantly over time; however, they are more stable among stations at the same street intersection. We establish the equilibrium relationships between price dispersion and key variables from consumer search models. Price dispersion increases with the number of firms in the market, decreases with the production cost, and increases with search costs.