Price Dispersion

We describe firm pricing when consumers search passively and follow simple reservation price rules. In stark contrast to other models in the literature, this approach yields equilib- rium price dispersion in pure strategies even when firms have the same marginal costs. In equilibrium, lower price firms earn higher profits. The range of price dispersion increases with the number of firms: the highest price is the monopoly one, while the lowest price tends to marginal cost. The average transaction price remains substantially above marginal cost even with many firms. Introducing shoppers who buy from the cheapest firm may increase market prices.