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Instability of endogenous price dispersion equilibria: A simulation
Author(s) -
Herrenbrueck Lucas
Publication year - 2018
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12355
Subject(s) - price dispersion , dispersion (optics) , benchmark (surveying) , competitor analysis , economics , yield (engineering) , microeconomics , order (exchange) , econometrics , finance , physics , materials science , management , geodesy , optics , metallurgy , geography
Models of price posting by firms and search by consumers (such as Burdett and Judd 1983), often feature equilibria with endogenous price dispersion. However, such equilibria are strategically fragile. In order to investigate how robust they are in the absence of an external coordination mechanism, I simulate various protocols firms may use to update their prices. Despite firms being myopic, some protocols yield results close to the benchmark model. If firms rush to update before observing competitors’ actions, profits are higher on average but volatile and cyclical. With cost dispersion, prices become more stable as they are more closely tied to costs. All results are robust to moderate menu costs.