Abstract
What sort of equilibrium exists in markets where resources have to be used to acquire information? Specifically, the question has been raised as to whether the existence of information costs can lead to equilibria with price dispersion. The interaction between consumers and firms is analyzed when consumers with different search costs search for low-price firms, while firms try to obtain information about their demand curves by experimenting with price changes. The behavior on one side of the market thus affects what the other side does and vice-versa. It is shown that if the distribution of prices degenerates to a single price, the monopoly price is the only conceivable equilibrium price. Moreover, it is shown that there might exist an equilibrium with price dispersion which satisfies the Nash condition. The relation between this equilibrium price distribution and the search cost distribution is analyzed. The necessary and sufficient condition for the search cost distribution with respect to a price dispersion equilibrium is derived.
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