Working Paper

A simple model of price dispersion

Abstract: This article considers a simple stock-flow matching model with fully informed market participants. Unlike in the standard matching literature, prices are assumed to be set ex-ante. When sellers pre-commit themselves to sell their products at an advertised price, the unique equilibrium is characterized by price dispersion due to the idiosyncratic match payoffs (in a marketplace with full information). This provides new insights into the price dispersion literature, where price dispersion is commonly assumed to be generated by a costly search of uninformed buyers.

JEL Classification: C78; D43;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2012

Number: 112

Note: Published as: Chudik, Alexander (2012), "A Simple Model of Price Dispersion," Economics Letters 117 (1): 344-347.