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Consumer Search, Price Dispersion, and Asymmetric Pricing

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This dissertation consists of a study of the consequences of consumers’ imperfect information on market clearing prices. The traditional paradigm in economics assumes consumers have perfect information about the prices in the market. When this assumption is replaced by the more realistic one of costly information acquisition (consumer search) the predictions from the perfectly competitive market change radically. Price dispersion emerges even when firms are identical and sell homogeneous products. Moreover, profits or information rents are captured by the sellers in the long run.
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University of California
Los Angeles
Consumer Search, Price Dispersion, and
Asymmetric Pricing
A dissertation submitted in partial satisfaction
of the requirements for the degree
Doctor of Philosophy in Economics
by
Mariano Emilio Tappata
2006

c Copyright by
Mariano Emilio Tappata
2006

The dissertation of Mariano Emilio Tappata is approved.
Daniel Ackerberg
Bryan Ellickson
Sushil Bikhchandani
David K. Levine, Committee Co-chair
Hugo Hopenhayn, Committee Co-chair
University of California, Los Angeles
2006
ii

To my wife Florencia, my sons Felipe and Benjam´ın
and especially to my parents
iii

Table of Contents
1
Rockets and Feathers. Understanding Asymmetric Pricing. . .
1
1.1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1.2
The model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
1.3
Dynamics and asymmetric pricing . . . . . . . . . . . . . . . . . .
18
1.4
More sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
1.5
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31
Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
A - Proofs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
B - Multiunit Demands . . . . . . . . . . . . . . . . . . . . . . . .
38
C - Sequential Search . . . . . . . . . . . . . . . . . . . . . . . . .
48
2
Price Dispersion and consumer search.
The Retail Gasoline Markets. . . . . . . . . . . . . . . . . . . . . . . .
60
2.1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60
2.2
Consumer Search and Price Dispersion . . . . . . . . . . . . . . .
63
2.3
The gasoline market
. . . . . . . . . . . . . . . . . . . . . . . . .
67
2.4
Price dispersion analysis . . . . . . . . . . . . . . . . . . . . . . .
69
2.5
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81
iv

List of Figures
1.1
Equilibrium with uniformly distributed search costs . . . . . . . .
14
1.2
Market equilibrium with shoppers and homogeneous nonshoppers
16
1.3
Equilibrium price distribution and number of stores (c = 0, µ = 0.2) 27
1.4
Maximum expected gains from search and the number of firms . .
29
1.5
Cost pass-through . . . . . . . . . . . . . . . . . . . . . . . . . . .
31
1.6
Consumer demand and firms’ NBR . . . . . . . . . . . . . . . . .
40
1.7
Gains from search and price dispersion with linear demands. . . .
43
1.8
Higher production costs. Constant elasticity demands.
. . . . . .
45
1.9
Numerical simulations for θ > 1 . . . . . . . . . . . . . . . . . . .
46
1.10 Updated prior and unique reservation price . . . . . . . . . . . . .
55
2.1
Rank reversals in prices
. . . . . . . . . . . . . . . . . . . . . . .
72
2.2
Cumulative rank reversals and distance . . . . . . . . . . . . . . .
73
2.3
Price level and dispersion . . . . . . . . . . . . . . . . . . . . . . .
76
2.4
Percentage of articles published in the AER, JPE, and Economet-
rica on Information, Search or Price Dispersion . . . . . . . . . .
78
2.5
Industry structure . . . . . . . . . . . . . . . . . . . . . . . . . . .
80
v

List of Tables
1.1
Market equilibrium with shoppers and homogeneous nonshoppers
18
1.2
Expected gains from search
. . . . . . . . . . . . . . . . . . . . .
29
1.3
Maximum E[p − pmin|c, n] and n . . . . . . . . . . . . . . . . . . .
29
2.1
Summary Statistics . . . . . . . . . . . . . . . . . . . . . . . . . .
70
2.2
Kolmogorov-Smirnov equality of distributions test . . . . . . . . .
75
2.3
Models of search
. . . . . . . . . . . . . . . . . . . . . . . . . . .
79
vi

Acknowledgments
I would like to thank many people for all their support during the dissertation
process. Starting with my advisors, I have only gratitude to my co-chairs David
K. Levine and Hugo Hopenhayn, who -in different ways- helped me enormously
in each step of the way. David kindly accepted to be the chair of my dissertation
even though my original projects were only tangential to his research interests.
He was nevertheless, always very supportive and provided invaluable guidance
every time I was not sure how to approach certain economic problems. I am
also grateful for his patience and dedication with grant aplicactions and during
the job market process. Hugo’s arrival at UCLA changed the direction and -
most importantly- the speed of my work. Every talk we had was particularly
illuminating, and I think I learned more of Industrial Organization during these
talks than ever before. He was constantly pushing me to think about important
issues and redirected my work when I would try to solve obvious (to him!) and
therefore minor problems. I hope some day to reach only a fraction of his clear
and rigorous way of approaching the study of economics. His kindness expanded
beyond the academics, and Hugo -as well as Estela- were very generous with me
and my family.
I would also like to thank the other members of my committee for their help
and encouragement. Dan Ackerberg provided invaluable insights on my empirical
projects and taught me the most interesting course during my PhD. He has the
gift of identifying the roots of any result and was kind enough to share it with me.
Although there is not a lot of empirical work on this dissertation, I only blame
it on Dan’s stay in Arizona. However, I am sure his influence on my research
will become more explicit in my future work. In retrospect, I regret not having
vii

interacted more with both Bryan Ellickson and Sushil Bikhchandani. The few
times that I asked for their help, they were incredibly open and welcoming, as
well as insightful. I also would like to thank all my UCLA professors from whom
I benefited being their student and/or talking after my presentations. In particu-
lar Hongbin Cai, Harold Demsetz, Moshe Buchinsky, John Riley, Bill Zame, and
Jean-Laurent Rosenthal.
I have made great friendships at UCLA and learned a lot from each one of
them. Thanks to Mauro, Mati, Guille, mono, Roberto, Juan Manuel, David
B.,Juan , Rolf, David R., Christine, and Miguel. I also want to thank Santiago
Urbiztondo, Walter Cont, Jose Wynne and Alito Harberger. Without their help,
I would have never started my graduate studies at UCLA.
These past five years have been a wonderful and fulfilling experience. They
would not have been possible without the relentless support from my family.
Thanks to uncle Henry and our Californian family, things were so much easier
with their support. Thanks to my wife Florencia for her patience and under-
standing, she gave me strength during the most difficult times and helped me
read and revise my manuscripts innumerable times. Last, but most importantly,
I am eternally grateful to my parents, Heber and Anah´ı, who taught me the
power of sacrifice and shared their passion for economics.
viii

Vita
March, 16, 1973 Born, Bah´ıa Blanca, Argentina
1998
Licenciado (Economics)
Universidad Nacional de La Plata
La Plata, Argentina
1996–1999
Advisor of the Secretary of Fiscal Policy
Ministry of Finance, Province of Buenos Aires
La Plata, Argentina
1998–2000
Lecturer
Universidad Nacional de La Plata
La Plata, Argentina
1999–2000
M.A. (Finance)
Universidad Torcuato Di Tella
Buenos Aires, Argentina
2000
Best Teaching Assistant Award
Master in Finance
Business School, Universidad Torcuato Di Tella
Buenos Aires, Argentina
1999–2001
Junior Researcher
Center for Financial Research
Universidad Torcuato Di Tella, Argentina
2001–2002
Bradley Foundation Fellowship
ix

Document Outline

  • Rockets and Feathers. Understanding Asymmetric Pricing.
    • Introduction
    • The model
    • Dynamics and asymmetric pricing
    • More sellers
    • Conclusion
    • Appendices
      • A - Proofs
      • B - Multiunit Demands
      • C - Sequential Search
  • Price Dispersion and consumer search. The Retail Gasoline Markets.
    • Introduction
    • Consumer Search and Price Dispersion
    • The gasoline market
    • Price dispersion analysis
    • Conclusion
    • Appendix
  • References

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