Tuesday, October 1, 2013
Benjamin Eden (Vanderbilt University) explores Price dispersion and efficiency.
ABSTRACT: The paper distinguishes between rigid price and flexible price versions of the Prescott (1975) “hotels” model. I focus on two dynamic models that allow for storage: The Bental and Eden (1993) model of all year round goods and the more recent Deneckere and Peck (2012) model of seasonal goods. The formulation follows the standard competitive analysis tradition with non-standard definition of markets: The set of markets that open depends on the state of demand. I show that when prices are flexible, the equilibrium outcome is efficient if the probability of becoming active depends on the aggregate state but not on the buyer's type. If prices are rigid the equilibrium outcome is in general not efficient except for the case in which there are no costs for delaying trade. The cost of delay is also relevant for price dispersion: Lower cost of delays leads to lower price dispersion.