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Rational Buyers Search When Prices Increase

Author

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  • Cabral, Luis
  • Gilbukh, Sonia
Abstract
We develop a dynamic pricing model motivated by observed patterns in business-to-business (and some business-to-customer) transactions. Seller costs are perfectly correlated and evolve according to a Markov process. In every period, each buyer observes (for free) the price set by their current supplier, but not the other sellers' prices or the sellers' (common) cost level. By paying a cost s the buyer becomes "active" and benefits from (Bertrand) competition among sellers. We show that there exists a semi-separating equilibrium whereby sellers increase price immediately when costs increase and otherwise decrease price gradually. Moreover, buyers become active when prices increase but not otherwise. In sum, we deliver a theory whereby buyers become active ("search") if and only if their supplier increases price.

Suggested Citation

  • Cabral, Luis & Gilbukh, Sonia, 2019. "Rational Buyers Search When Prices Increase," CEPR Discussion Papers 13940, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13940
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    Cited by:

    1. Fishman, Arthur, 2021. "Finitely repeated search and the diamond paradox," Economics Letters, Elsevier, vol. 205(C).
    2. Xu, Jiayi & Zhang, Xiao-Bing & Liu, Yang, 2024. "Asymmetric search behavior for gasoline prices: Evidence from the Chinese gasoline market," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 699-712.
    3. Weiqing Li & Qianyi Dan & Maomao Chi & Weijun Wang, 2021. "Influence of Price Level and Perceived Price Dispersion on Consumer Information Search Behaviour: Moderating Effect of Durables and Consumables," Sustainability, MDPI, vol. 13(4), pages 1-13, February.
    4. Sven Heim, 2021. "Asymmetric cost pass-through and consumer search: empirical evidence from online platforms," Quantitative Marketing and Economics (QME), Springer, vol. 19(2), pages 227-260, June.
    5. Omid Zamani & Thomas Bittmann & Jens‐Peter Loy, 2024. "Does the internet bring food prices closer together? Exploring search engine query data in Iran," Journal of Agricultural Economics, Wiley Blackwell, vol. 75(2), pages 688-715, June.
    6. Arthur Fishman, 2021. "Active search in the Diamond search model," Economics Bulletin, AccessEcon, vol. 41(3), pages 2127-2132.
    7. Christos Genakos & Blair Yuan Lyu & Mario Pagliero, 2024. "Asymmetric pass-through and competition," CEP Discussion Papers dp2028, Centre for Economic Performance, LSE.

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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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