Sequentially Mixed Search and Equilibrium Price Dispersion
56 Pages Posted: 23 Nov 2018 Last revised: 9 Mar 2022
Date Written: October 8, 2018
Abstract
Many markets feature sequentially mixed search (SMS), which has directed search for an offer distribution followed by noisy matching with multiple offers. I construct a tractable model of SMS, establish existence of a unique equilibrium, and analyze the novel implications of the equilibrium on quantities and price dispersion. Moreover, I show that an increase in the meeting efficiency widens price dispersion. An extension endogenizing search effort shows that the equilibrium is constrained inefficient, where visitors' search effort is inefficiently high and can be a strategic complement. Under a mild condition, policies that restore efficiency should lean against the wind by increasing the tax on the joint value of trade in an economic boom and reducing this tax in a recession.
Keywords: Sequentially mixed search, Price dispersion, Efficiency
JEL Classification: D40, D60, D83
Suggested Citation: Suggested Citation