Monopolistic Competition and Sequential Search

What is it about?

In this paper I show that under reasonable assumptions concerning market behavior, Nash-type eqilibria exclude multiple-price structures. Since the existence of price dispersion is the very basis of search behavior, whatever its form, this conclusion seems to negate search. Surely, buyers would catch on soon enough and stop searching. But then, sellers, realizing that consumers have ceased gathering information, should begin raising prices, a process that should stimulate search whose outcome is presumably a single price. Therefore, equilibrium (if it exists) can be enforced by potential search, and any deviation from a single price equilibrium would prompt a renewed process toward equilibrium, triggered by the mere propensity to search. This reflects a fundamental information externality: individuals who will search can discipline the entire market, if their number is sufficient. Indeed, in cases where the competitive price is a single price, uncertainty causes no loss in efficiency. It is only when there are not enough perfectly informed buyers that welfare could be increased by the formation of some information gathering technology.

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Photo by Georgia Visacri on Unsplash

Photo by Georgia Visacri on Unsplash

Why is it important?

The point of this paper is a negative one in that sequential search under some assumption of the distribution of market prices in monopolistic competition will not lead to a distribution of prices required by equilibrium.