Consumer Search, Price Dispersion, and Price Cycles

Speaker: Prof Vladimir Smirnov

Affiliation: University of Sydney

Location: Room 214, Chamberlain Building (#35), St Lucia Campus

Zoom: https://uqz.zoom.us/j/82603079317

Abstract: 

We study how consumer information shapes both price dispersion and price dynamics in oligopoly. We develop a search model with any finite number of symmetric firms and consumers who differ in their knowledge of current prices. Some consumers are fully informed, some are uninformed, and others rely partly on past prices when deciding whether to continue searching. This creates a dynamic link between previous market outcomes and firms’ current pricing incentives.

The model shows how the same information frictions that generate price dispersion can also produce endogenous price cycles. When past prices are high, firms have stronger incentives to undercut; when prices become sufficiently low, firms instead raise prices to restore margins. The resulting equilibrium dynamics generate gradual price declines followed by rapid price restorations, without requiring alternating moves, price commitment or forward-looking firms. We also examine how the number of competitors changes the equilibrium price distribution and the length, depth and volatility of price cycles.

As complementary evidence, we briefly consider reinforcement-learning pricing simulations. These show that changes in the share of consumers who compare prices can alter not only average prices but also the dynamic form of competition. Together, the results suggest that consumer information should be evaluated through its effects on the entire price path, rather than on average prices alone.