Price dispersion in a simultaneous move salop-stiglitz search model without rationing

Abstract

Salop and Stiglitz analyzed an equilibrium search model under a Stackelberg assumption that consumers could react to changes in the distribution of prices charged by firms even though they did not know which particular firms were charging the lowest price. In this chapter we assume that firms and consumers move simultaneously so that consumers cannot react to changes in the price distribution. We also assume that a firm cannot limit sales if demand exceeds its desired supply at the price it sets. In contrast to Salop and Stiglitz, a single-price equilibrium at the monopoly price always exists. For most distributions of consumer search costs, a range of two-price equilibria will also exist. In the two-price equilibria, the high price is always the monopoly price while the low price varies in a range above the minimum of average total cost.