Sequentially mixed search and equilibrium price dispersion

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Abstract

Many markets feature sequentially mixed search (SMS), which is search directed toward a price distribution followed by noisy matching with multiple offers. I construct a tractable model of SMS, establish existence of a unique equilibrium, and prove that the equilibrium is constrained efficient. Although individuals on each side of the market are homogeneous and search is directed, the equilibrium has a non-degenerate and continuous distribution of posted prices on a connected support. Despite the possibility of multiple offers, the highest price is lower than the joint value of a match so that both sides of the market obtain strictly positive surpluses of trade at all equilibrium prices. This feature captures the common practice that searchers restrict search below a price bound. Moreover, I show that an increase in the meeting efficiency widens price dispersion, which helps explain the puzzling fact that the increased use of the Internet has not reduced price dispersion.

Original languageEnglish (US)
Article number105735
JournalJournal of Economic Theory
Volume213
DOIs
StatePublished - Oct 2023

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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