The Stability of Price Dispersion under Seller and Consumer Learning
Ed Hopkins and Rob Seymour
To appear in 'International Economic
Review', November 2002.
"In many markets it is possible to find rival sellers charging
different prices for the same good. Earlier research has attempted to
explain this phenomenon by demonstrating the existence of dispersed
price equilibria when consumers must make use of costly search to discover
prices. We ask whether such equilibria can be learnt when sellers adjust
prices adaptively in response to current market conditions. With consumer
behaviour fixed, convergence to a dispersed price equilibrium is possible
in some cases. However, once consumer learning is introduced, the monopoly
outcome first found by Diamond (1971) is the only stable equilibrium."