Steady State Price Distributions in a Noisy Search Equilibrium

In a model of noisy search where customers repeat purchase, this paper characterises an equilibrium where each store changes its price as its stock of regular customers changes through time. As stores in the market are of different size (and age), price dispersion is an equilibrium outcome. Along the equilibrium path, smaller (younger) stores announce lower prices and grow faster than larger (established) stores. Furthermore, the youngest stores set prices below marginal cost to build business up quickly. Each is willing to take an early operating loss to attract customers quickly, in anticipation of extracting customer switching rents in the future. Journal of Economic Literature Classification Numbers: D40, L10. © 1997 Academic Press.