A model of price search and ambiguity

Available from: 
October 2013
Paper author(s): 
Othon Moreno Gonzalez (Banco de México)
Topic: 
Theory
Year: 
2013


We present a model of price search under ambiguity with N >2 firms selling an homogeneous good with a common marginal cost, either high or low. A unit mass of consumers with common valuation for the good might engage in non-sequential price search. Additionally, consumers are assumed to be ambiguous, in the sense of Gilboa and Schmeidler (1989), regarding the marginal cost level. We characterize equilibria of this game for high and low levels of the search cost and show that firms extract abnormal prots for low realizations of the marginal cost. Furthermore we show that, as the search cost goes to zero, the equilibrium of the game under the low cost regime does not converges to the Bertrand marginal-cost pricing.

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Research section: 
Lacea 2013 annual meeting
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