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Buyer Subsidies in an Equilibrium Model of Price Dispersion
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Henrik Orzen
Published/Copyright:
November 30, 2019
Abstract
We present a model of equilibrium price dispersion in which a per-unit subsidy to buyers can reduce average prices. The reason is that subsidies have two effects on average prices that work in opposite directions. First, subsidies raise buyers’ willingness-to-pay, and by itself this causes firms to charge higher prices. However, since a higher willingness-to-pay lowers the relative cost of search, subsidies also induce more search. This creates a second effect that puts pressure on firms to reduce prices.We show that the second effect can dominate, thus causing an overall reduction in average price.
Keywords: Price dispersion; search
Published Online: 2019-11-30
Published in Print: 2003-12-01
© 2019 by Walter de Gruyter Berlin/Boston
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- The Biological Standard of Living in the Two Germanies
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- Buyer Subsidies in an Equilibrium Model of Price Dispersion
Articles in the same Issue
- The Regime-Dependent Determination of Credibility: A New Look at European Interest Rate Differentials
- Interest Rate Volatility Prior to Monetary Union under Alternative Pre-Switch Regimes
- The Biological Standard of Living in the Two Germanies
- Unemployment, Factor Substitution and Capital Formation
- Buyer Subsidies in an Equilibrium Model of Price Dispersion
