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On the Welfare Gains of Price Dispersion
Author(s) -
DUTU RICHARD,
JULIEN BENOIT,
KING IAN
Publication year - 2012
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2012.00510.x
Subject(s) - price dispersion , margin (machine learning) , economics , dispersion (optics) , inflation (cosmology) , welfare , monetary economics , price level , mid price , price setting , econometrics , microeconomics , market economy , physics , machine learning , theoretical physics , computer science , optics
Can price dispersion be associated with higher levels of welfare? To answer we compare two economies that differ only in the way prices are formed. In the first, sellers post a unique price–quantity pair, with no price dispersion. In the second, sellers post a quantity only and let prices be determined ex post by realized demand, resulting in price dispersion. We show that while agents trade lower quantities when prices are dispersed (an intensive margin effect), they also trade more often (an extensive margin effect). At low inflation, the extensive margin dominates making agents better off with price dispersion.