Equilibrium Price Distribution with Sequential Search

Abstract

This paper develops a model of multi-commodity search, where a continuum of identical consumers search optimally (sequentially) and with strictly positive search costs for two types of commodities. A continuum of homogenous firms, having the same, constant, marginal costs, select and post prices for either one of the commodities types. It is shown that any equilibrium in this model will display price dispersion, with no two firms charging the same price with positive probability. A specific equilibrium is identified, and comparative statics conducted - showing that the equilibrium distribution of prices converges to the competitive price as the cost of search converges to zero. These results are generated without the need for any heterogeneity amongst agents, or sub-optimal search strategies, required for price dispersion in existing models, and suggest that Diamond's (1971) 'monopoly price paradox' is an artefact of his single-commodity search assumption. A further extension shows that, in the search equilibrium identified, homogeneous firms may optimally choose to adopt differing production techniques for a homogeneous commodity, and that multiple equilibria with differing levels of technological adoption may also result. The results highlight the importance the process of search may have, not only on prices, but also on the structure and the efficiency of the market in general.