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Author: Mariano Emilio Tappata
Publisher:
ISBN:
Category : Consumer behavior
Languages : en
Pages : 168
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Book Description
In Chapter I, I explore the theoretical implications of consumer search on price dynamics. Previous empirical work established that in most markets "prices rise like rockets but fall like feathers." I show that a model with competitive firms and rational partially-informed consumers can generate such asymmetric response to costs by firms. In contrast to public opinion and past work, collusion is not necessary to explain such stylized fact.
Author: Mariano Emilio Tappata
Publisher:
ISBN:
Category : Consumer behavior
Languages : en
Pages : 168
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Book Description
In Chapter I, I explore the theoretical implications of consumer search on price dynamics. Previous empirical work established that in most markets "prices rise like rockets but fall like feathers." I show that a model with competitive firms and rational partially-informed consumers can generate such asymmetric response to costs by firms. In contrast to public opinion and past work, collusion is not necessary to explain such stylized fact.
Author: Dennis Eggert
Publisher: GRIN Verlag
ISBN: 3638803473
Category : Business & Economics
Languages : en
Pages : 36
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Book Description
Seminar paper from the year 2006 in the subject Economics - Industrial Economics, grade: 1,0, Helsinki School of Economics, course: Industrial Organisation, 18 entries in the bibliography, language: English, abstract: The main issue in the article is the derivation of a model in which prices can differ in equilibrium, even though the goods are homogeneous and there is asymmetric information in the market. The reason for this price dispersion is caused by consumer heterogeneity. Salop and Stiglitz explain, that "because of differences in preference or ability, some agents perform much better than others in market decisions." To model this kind of heterogeneity they assign different costs of gathering certain information to the consumers. For simplicity they part the consumers in two groups: The first one consists of low-cost information gatherer and the other group has higher cost to gain complete information. For further simplicity there are just two levels of information: to be completely informed or to be not informed at all. Furthermore the costs to become an informed consumer are fixed. The differences in information in this model regard the locations of the shops. All consumers know about all prices that are in the market, they just do not know where the shop with a certain (the lowest) price is. The shops on the other hand have complete information about the market. They know about the differences between the consumers and can compute the demand that will occur, when they ask a certain price. So they face a trade-off between higher prices and lower demand. It is important to state why there is a possibility of raising the price and not to loose all demand like it would be in a perfect market. When the rise in price is not too high, it does not pay for the high-cost information gatherer to become completely informed. Their expected loss by buying randomly either in low- or high-priced shops is lower than the fixed cost of gathering the information. All toget
Author: Chiaen John Wu
Publisher:
ISBN:
Category : Consumers' preferences
Languages : en
Pages : 276
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Book Description
Author: Dennis Eggert
Publisher: GRIN Verlag
ISBN: 3638801381
Category : Business & Economics
Languages : en
Pages : 16
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Book Description
Seminar paper from the year 2006 in the subject Economics - Industrial Economics, grade: 1,0, Helsinki School of Economics, course: Industrial Organisation, language: English, abstract: The main issue in the article is the derivation of a model in which prices can differ in equilibrium, even though the goods are homogeneous and there is asymmetric information in the market. The reason for this price dispersion is caused by consumer heterogeneity. Salop and Stiglitz explain, that “because of differences in preference or ability, some agents perform much better than others in market decisions.” To model this kind of heterogeneity they assign different costs of gathering certain information to the consumers. For simplicity they part the consumers in two groups: The first one consists of low-cost information gatherer and the other group has higher cost to gain complete information. For further simplicity there are just two levels of information: to be completely informed or to be not informed at all. Furthermore the costs to become an informed consumer are fixed. The differences in information in this model regard the locations of the shops. All consumers know about all prices that are in the market, they just do not know where the shop with a certain (the lowest) price is. The shops on the other hand have complete information about the market. They know about the differences between the consumers and can compute the demand that will occur, when they ask a certain price. So they face a trade-off between higher prices and lower demand. It is important to state why there is a possibility of raising the price and not to loose all demand like it would be in a perfect market. When the rise in price is not too high, it does not pay for the high-cost information gatherer to become completely informed. Their expected loss by buying randomly either in low- or high-priced shops is lower than the fixed cost of gathering the information. All together this consumer heterogeneity and the fully informed shops can lead to price dispersion in equilibrium, even though the goods are homogeneous and there is the difference in information between the actors.
Author: Matthew S. Lewis
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
This article proposes a new explanation for why retail prices respond more quickly to cost increases than cost decreases. I develop a search model that assumes consumers' expectations of prices are based on prices observed during previous purchases. This model predicts that consumers search less when prices are falling, which results in higher profit margins and a slower price response to cost changes. I then empirically examine patterns of retail gasoline price response and price dispersion to show that this model predicts observed price behavior better than previously suggested explanations.
Author: Changxia Ke
Publisher:
ISBN:
Category : Consumer behavior
Languages : en
Pages : 220
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Book Description
This thesis investigates consumer search behavior in different contexts and its implications on certain market outcomes. It consists of three self-contained essays. Part one investigates if people search optimally and how price promotions (such as the provision of price discounts) influence search intensity and risk-taking behavior. We start with a typical sequential search task in a finite time horizon (with exogenously determined price dispersion) as the baseline treatment. In the two experimental treatments, exogenous discounts are introduced to the search process. The treatments differ in the amount of information on the discounts revealed to the subjects. Subjects' search behavior is roughly consistent with optimality for a risk-neutral agent, but significantly influenced by the introduction of discount vouchers. We find that subjects' search intensity is significantly reduced if they are in a shop that offers discounts, even when the monetary benefit induced by the discount has been taken into account. This suggests that people seem to gain extra non-monetary utility from buying a discounted product. Alternatively, subjects might overestimate the value of a discount. Following the findings in part one, we focus on price-framing effects of discounts on consumer search behavior in part two. In order to isolate the price-framing effect from all other possible influences, we adopt an extremely simple two-shop search model in which a consumer who sees the price for an item in a shop has to decide either to buy it or to incur a search cost to learn the ex-ante uncertain price in a second shop. The experiment is designed such that a rational buyer should make identical decisions in the base treatment (where prices are posted as net prices in both shops) and in the experimental treatments (where the price in one of the shops is framed as a gross price with a discount, holding the net-price constant). Using structural estimation of the observed risk preferences, we find that people tend to be more risk-averse and hence buy from the initial shop more often in the discount treatments, regardless of where the discount is offered. The seemingly trivial change to a discount-framing increases the complexity of the decision problem. Subjects reveal a tendency to stick with the comparatively less complex options more frequently as the complexity of the decision problem increases. However, this bias declines with experience, as subjects become more and more familiar with the framing. In part three, we study search behavior in a market experiment, where prices are determined endogenously by human players. More specifically, we examine the behavioral factors and the underlying mechanism which drive the widely observed asymmetric price adjustment to cost shocks (in a world with costly search behavior and information asymmetry). We show that price dispersion, as well as asymmetric price adjustment to cost shocks, arises in experimental markets, even though the standard theory predicts neither. We find that after controlling all the potential theoretical factors, the observed price dispersion can be explained by the presence of bounded rational play. Under price dispersion, asymmetric price adjustment arises naturally, as it is harder for buyers to learn that a negative cost shock has taken place. Learning is much quicker after a positive shock.
Author: Matthew Stephen Lewis
Publisher:
ISBN:
Category :
Languages : en
Pages : 244
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Book Description
Author: Aleksandr Yankelevich
Publisher:
ISBN:
Category : Electronic dissertations
Languages : en
Pages : 116
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Essay 1: "Price-Matching in a Sequential Search Duopoly" While substantial research has tried to determine if price-matching guarantees are anti-competitive, most previous studies have overlooked the effect that these policies have on consumer search behavior. This essay examines how price-matching guarantees affect consumer behavior and prices in a model of sequential price search. By endogenizing consumers' acquisition of price information, I find that price-matching may raise prices in three new ways. First, price-matching diminishes firms' incentives to lower prices to attract consumers who have no cost of search. Second, for consumers with positive search costs, price-matching lowers the marginal benefit of search, inducing them to accept higher prices. Finally, higher prices may come about because price-matching can lead to asymmetric equilibria where one firm runs fewer sales and both firms tend to offer smaller discounts than in a symmetric equilibrium. These price increasing effects grow in proportion to the number of consumers who make use of price-matching guarantees as well as in the amount of asymmetry that prevails in equilibrium. Essay 2: "Asymmetric Sequential Search" (with Carmen Astorne-Figari) Rival firms often find themselves catering to a very different mix of customers from that of their competitors. This can lead to variations in pricing behavior even when other factors, such as product quality and the cost of production, are held constant across firms. In this essay, we use a model of sequential consumer price search to explore how asymmetries in the demand structures across firms impact firm pricing. In our model, a fraction of consumers must pay a cost to search for prices beyond their local firm and firms serve different fractions of local consumers. The price distribution of a firm with more local consumers first order stochastically dominates that of a firm with fewer local consumers and places positive probability on its upper bound. This means that a firm with more local consumers has a higher average price and runs sales less frequently. The frequency of sales diminishes in the number of local consumers, but price dispersion persists even if all consumers are local to a single firm. Moreover, as the fraction of consumers who search without cost increases, firms tend to offer bigger discounts, while the likelihood of a sale may fall. Essay 3: "Energizer: The Bunny or the Battery? Advertising as a Way to Publicize Either the Brand or the Good" (with Carmen Astorne-Figari) Experimental studies and surveys of consumers suggest that an important role of advertising is to convince consumers that they want the product and to buy it from the brand advertising it. However, because of competitive clutter, an advertisement that induces a consumer to enter the market may lead her to purchase from a competing brand. Thus, we can characterize two effects of advertising: (i) an effect that benefits the individual firm by promoting binding between the brand and the advertised good and (ii) a "public good" quality that benefits all producers of the good by inducing additional consumers to enter the market. We analyze these two effects to study the relationship between advertising and market size, price, firm profit and consumer welfare.
Author: George Alessandria
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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This paper develops a model of consumer search consistent with the evidence of substantial price dispersion within countries. This model is used to study international relative price fluctuations. Consumer search frictions permit firms to price discriminate across markets based on the local wage of consumers. With price dispersion, the market price of a good does not measure its resource cost. This breaks the tight link between relative quantities and relative prices implied by most models. The authors show that volatile and persistent fluctuations in relative wages lead to volatile and persistent fluctuations in relative prices at the disaggregate level. These deviations from the law of one price substantially increase international relative price volatility. With productivity and taste shocks, the model generates international business cycles that closely match the data.
Author: Saul Lach
Publisher:
ISBN:
Category : Competition
Languages : en
Pages : 37
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Book Description
In markets where price dispersion is prevalent the relevant question is not what happens to the price when the number of firms changes but, instead, what happens to the whole distribution of equilibrium prices. Using data from the gasoline market in the Netherlands, we find, first, that markets with a given number of competitors have price distributions that first-order stochastically dominate the corresponding price distributions in markets with one more firm. Second, the competitive response varies along the price distribution and is stronger at prices in the medium to upper part of the distribution. Finally, consumer gains from competition depend on how well informed they are and turn out to be larger for relatively attentive consumers. To account for these empirical results, we propose a generalisation of Varian's (1980) well-known model of sales that allows for richer heterogeneity in consumer price information.
