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On the welfare gains of price dispersion

journal contribution
posted on 2012-08-01, 00:00 authored by Richard Dutu, J Benoit, I King
Can price dispersion be associated with higher levels of welfare? To answer we compare two economies that differ only in the way prices are formed. In the first, sellers post a unique price–quantity pair, with no price dispersion. In the second, sellers post a quantity only and let prices be determined ex post by realized demand, resulting in price dispersion. We show that while agents trade lower quantities when prices are dispersed (an intensive margin effect), they also trade more often (an extensive margin effect). At low inflation, the extensive margin dominates making agents better off with price dispersion.

History

Journal

Journal of money, credit and banking

Volume

44

Issue

5

Pagination

757 - 786

Publisher

Wiley-Blackwell Publishing, Inc.

Location

Hoboken, N.J.

ISSN

0022-2879

eISSN

1538-4616

Language

eng

Publication classification

C1 Refereed article in a scholarly journal

Copyright notice

2012, Wiley-Blackwell Publishing, Inc.

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